Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

Last week US equity markets sold off sharply on Friday after a strong jobs report sent Treasury yields sharply higher. The S&P 500 ended the week down just under 2%, its fourth weekly decline in the last five weeks. The weakness carried through coming out of the weekend as yields and oil prices continued to move higher and tech stocks were under pressure as President Biden announced additional restrictions on the export of AI technology. However, major indices tested some key technical levels after the open with the S&P 500 filling the election gap taking the index down just over 5% from its highs. While the equal-weight version of the index got within 10pts of its 200d moving average a level that has not been tested since it was reclaimed in November of 2023 after the initial Fed Pivot. This brought in some buying interest and despite the tech underperformance most major indices ended the day higher. 

Tuesday brought the first of this week’s inflation data with PPI coming in slightly better than feared. There was only a minimal pullback in Treasury yields and while equity markets did end mostly higher you could see that traders were nervous ahead of the all-important CPI report and the start of earnings season on Wednesday with the VIX spending most of the day just under 20.

Wednesday got off to a good start with UK inflation data coming in better than expected and a 10yr Gilt auction going off without a hitch. Not your typical catalyst but the situation in the UK has been a source of some volatility over the last week. The bank earnings started to roll in and by all accounts were strong with companies beating on both the top and bottom line with management teams highlighting business optimism heading into 2025. This had futures modestly higher ahead of the open, but the real fireworks came after the CPI report.

The report itself was mixed with headline coming in slightly above expectations driven by a jump in energy prices which accounted for 40% of the monthly increase. However, the core reading came in a tenth better than expected showing some moderation from the previous month up 3.2% on an annual basis. This was by no means a perfect report but did help Treasury yields fall sharply reversing all of the post jobs report move higher and equity markets reacted in kind with the S&P 500 ending the day up nearly 2% with the index closing just below its 50d moving average. 

On Thursday retail sales were solid pointing to a still resilient consumer and decent holiday shopping season confirming the commentary heard from retailers at the ICR conference earlier this week. It was a choppy session with the S&P 500 once again stalling out at its 50d moving average. Some dovish comments from Fed Governor Christopher Waller helped yields continue to pull back. Treasury Secretary nominee Scott Bessent seemed to do a good job during confirmation hearings. His talking points were in alignment with President Trump’s economic agenda highlighting the importance of extending tax cuts, downplaying the impact of tariffs on inflation, taking a hard stance on China and sanctions on Russia/Iran.  

The week closed out on a positive note with the S&P 500 up 1% bringing gains to just under 3% for the week. There wasn’t one specific driver today for today’s strength it felt more like a continuation of the recent bounce with the VIX pulling back to under 16 and the S&P 500 breaking above its 50d ma. Today was options expiration and the index essentially got pinned to the 6k level. 

If you’re searching for some headlines to point to for the strength there was a mix of better-than-expected China data, IMF global growth forecasts being revised up and Treasuries holding the bulk of the week’s rally. On the corporate front there were some more solid bank earnings but the numbers from industrials were more mixed. Today, tech stocks performed well after underperforming throughout the week. 

For the week there here was broad based . Cyclical/value sectors were the best performing sectors led by energy, financials and materials. The tech heavy sectors did end the week with gains but underperformed. Healthcare continues to be stuck in the mud despite a heavy week of corporate updates at the JP Morgan Healthcare conference including some M&A. Within the space equipment and life science tools outperformed with underperformance in insurers, pharma and vaccine makers.

Earnings - 

This week was the start of earnings season. If you missed it check out our Q4 Earnings Preview for some bigger picture thoughts. Things got off to a positive start with a strong round of bank earnings with companies beating on both the top and bottom line. NII/NIM, strong capital markets/investment banking numbers were strong while expenses were contained and there weren’t red flags related to credit. The bar is now clearly higher as we start to hear from the regional banks which won’t have the capital market tailwinds. Next week the breadth of companies is going to start to broaden out and so we’ll see how things start to shape up but the early industrial numbers were mixed.  

Global Markets -

Commodities - mostly higher. 

Last week US equity markets looked susceptible but as mentioned earlier traded right down to key technical levels (100d ma/election day gap), held and proceeded to rally sharply. The S&P 500 closed just above its 50d ma. This looks like a sideways consolidation pattern, the short-term downtrend isn't broken yet. On a weekly this was an outside reversal week so it looks like we might be able to build upon this week's rally.

The equal weight index tested and held the 200d setting up a double bottom with first target on that to ~7,450. It closed just below its 50d ma. There was also an outside reversal week. For both indices if this is going to develop into something more than a bounce you'll want to see the 20d start to catch price on pullbacks.

Economic data/Fed -   The focus shifted to inflation after last week’s labor market data. Inflation concerns have started to flare up given the recent rise in oil prices, concerns about the impact of Washington policy and the jump in inflation expectations in the U of Mich Sentiment survey didn’t help either. On Monday, the NY Fed’s Survey of Consumer Expectations also showed some increase but not nearly as dramatic. I wanted to take a moment to highlight just how politicized (and kind of ridiculous) the U of Mich readings truly are. This is a gauge that the Federal Reserve watches but I’m sure they are aware of this dynamic.

The PPI reading on Tuesday was slightly better than expected but did accelerate from the previous month.  Headline CPI was up 0.4% m/m and up 2.9% y/y driven by a 2.6% which accounted for 40% of the increased. Food prices did moderate a bit to 0.3% from 0.4%. Core came a tenth better than expected up 0.2% m/m and 3.2% y/y. On the goods side auto prices moderated with used cars up 1.2% down from 2% last month, recall we highlighted that some of that increase was likely related to storm activity. Apparel ticked lower during the holidays. Services inflation held steady at 0.3%. The shelter component was also up 0.3% for the second consecutive month. Headline did re-accelerate a bit however, broadly the disinflationary process continues but is becoming bumpy. 

This week's inflation data was modestly positive but weren't perfect.  I didn’t they really changed the Fed’s calculus. Last Friday I noted that the move in yields seemed to be an overreaction to that report and the large move this week just unwound that.

Yesterday one of the most influential Fed governors, Christopher Waller, begged to differ about the importance of the data (or at least his view hasn’t changed as radically as the market’s). He said that that if ongoing inflation data was similar to this week’s data that rate cuts in the first half of the year were still on the table. At the time of the “hawkish cut” in December I thought Fed Chair Powell still showed a preference to want to cut further and it’s pretty clear Fed Waller is in his camp. He did suggest that the Fed would look through the impact of tariffs and the potential impact of wildfires in the near-term. He also noted that the Q1 data could be a wildcard. Last year there were some negative seasonal impacts but that could possibly be a tailwind this year as those readings start to roll off the annual readings. 

Over the last week 10yr Breakeven inflation expectations had started to move higher testing the upper end of the range seen since 2023 ~2.45% this eased significantly following the data but is only a couple of basis points off the highs level so we’re not out of the woods just yet. 

Treasury yields were down >10bps across the curve pretty reversing most of last week’s move. Technically it was not quite an outside reversal week but this could be important from a technical perspective. I’m not convinced that all of the pressure is released but the issue from an equity market perspective was mostly about the velocity of the move not the absolute level.

The fiscal situation is still at the forefront of some investor concerns a note on that front today the CBO released its updated Budget and Economic outlook. The below highlights some of the issue in that the bulk of the deficit is coming from mandatory spending (Social Security/Medicare), areas that Washington has pledged not to touch and rising net interest cost not so much discretionary spending. Net interest cost now exceeds defense spending. 

US investment grade spreads tightened very slightly. Keep in mind as Treasury yields have sold off there has been very little impact on credit spreads, especially investment grade, so there wasn't much to reverse.

US high yield spreads did widen out a bit more recently. That unwound this week with spreads tightening by 18bps for the week. European spreads were a little tighter while emerging markets were about unchanged.

Equity markets are closed on Monday for MLK Day. It also Inauguration Day. President Trump is expected to hit the ground running with a wave of executive orders, which could create some volatility. Otherwise the focus will shift to earnings with the FOMC in a media blackout window and a quieter week of economic data. On that front, the highlight will be the global flash PMIs at the end of the week. Thursday night the BOJ also has its rate decision. Have a great weekend! Enjoy the football.

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