Last Week’s Markets in Review: Sticky Inflation is Problematic

Global equity markets finished mixed for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,079, representing a decline of 0.20%, while the Russell Midcap Index moved 0.44% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.47% over the week. As developed, international equity performance and emerging markets were mixed returning 0.02% and -0.79%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.83%.

The past week saw a substantial number of important economic data points released. The data gave investors fresh information concerning inflation (with the CPI report on Tuesday and the PPI report on Thursday), consumer behavior (with the Retail Sales report on Wednesday) and employment (with the Weekly Jobless Claims report also on Thursday). This important data will be discussed throughout the remainder of this week’s update.
The Labor Department reported that the Consumer Price Index (CPI) for January rose 0.5%, higher than the consensus estimate of 0.4%. On an annual basis, CPI showed a 6.4% increase. This annual result was 0.2% higher than estimates. The cost of shelter (0.7% for January and 7.9% annually) and energy (2.0% for January and 8.7% annually) were the main contributors to the inflationary results.

Later in the week, the January Producer Price Index (PPI) also exhibited an inflationary uptick. On the wholesale level, prices rose 0.7% for the month. This rise was greater than the market’s expectation looking for an increase of 0.4%. Both the CPI and the PPI caused much volatility in the equity markets, as investors began to reconsider future Federal Reserve interest rate actions.

As noted above, the consensus estimates for both CPI and PPI were not spot on, but it was Retail Sales for January that really shocked the Wall Street analyst community. On Wednesday, the Commerce Department reported that Retail Sales had risen by 3% for the month. Actual sales exceeded the consensus estimate of 1.9% by nearly 60%. For the month, all categories within the sales data were higher than the prior month. Food services and drinking places surged 7.2% to lead all major categories. Motor vehicle and parts dealers (up 5.9%), along with furniture and home furnishing stores (up 4.4%), were the next highest increases by category.

Weekly Jobless Claims reported last Thursday were the last piece of economic data that added to the market’s perception that the Fed will have to continue to fight inflation with restrictive monetary policy. For the week ending February 11th, first-time claims for unemployment benefits were 194,000, down 1,000 claims from the prior week and 5,000 claims below the consensus estimate. This result continues the trend of a low level of claims. The labor market remains resilient despite accelerating announced layoffs, primarily in the technology sector.

Investors should consider all the information discussed within this market update and many other factors when managing their investment portfolios. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

The Consumer Price Index, Producer Price Index and Weekly Jobless Claims data is sourced from the Department of Labor. Retail Sales data is sourced from the Commerce Department Equity Market, Fixed Income returns, and rates are from Bloomberg as of 2/17/23. Economic Calendar Data from Econoday as of 2/17/23. 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.