Last Week’s Markets in Review: Inflation Prints Give Mixed Signals

Global equity markets finished higher for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,784, representing an increase of 1.87%, while the Russell Midcap Index moved 0.58% last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 0.01% over the week. Developed international equity performance and emerging markets were mixed, returning 0.39% and -0.16%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.94%.

After cooling off throughout 2023, inflation ticked higher in the final monthly reading from the Labor Department. To start, the Consumer Price Index (CPI) rose by 0.3% for the month of December versus the November reading and 3.4% on an annual basis. These figures were higher than the previous monthly readings and the Dow Jones estimates of 0.2% (month-over-month) and 3.2% (year-over-year). However, when excluding the often-volatile food and energy prices, the index rose in line with expectations. Given that the report was not “too hot,” the results are unlikely to significantly influence the Fed’s decisions regarding potential rate cuts in 2024. Also of importance is that CPI is not the preferred measuring tool that the Fed will use when gauging inflation. For that update, we must patiently await the release of the Personal Consumption Expenditures (PCE) Index on January 26th.

On the other side of price inflation, the Producer Price Index (PPI) fell on a month-over-month basis in December by 0.1%, contrary to the consumer price reading. The drop in producer prices was digested positively by market participants as producer prices act more as a leading indicator for price inflation. Following these two inflationary readings, the futures market is increasingly expecting the Federal Reserve to begin cutting interest rates as early as March of this year. According to the CME group’s Fed Watch Tool, the probability of a rate cut in March now stands at 76%. Just a week prior, the futures market was expecting a cut with “only” a 60% probability.

Inflation and interest rates will remain top of mind for investors in 2024. The impact of both of these factors will have a significant effect on equity markets, fixed income securities, and economic growth. Due to their importance, we suggest that investors work with investment professionals to help ensure their portfolios are properly invested for the expected changes in these areas, consistent with their goals, tolerance for risk, and investment timeframes.

Best wishes for the week ahead!

Equity Market, Fixed Income returns, and rates are from Bloomberg as of 1/12/24. Economic Calendar Data from Econoday as of 1/12/24. CPI and PPI were sourced from the Labor Department on 1/11/24 and 1/12/24, respectively. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.