Halyard’s Weekly Wrap – 2/16/24 – May you enjoy Apres-Ski

In last week’s wrap we cautioned that despite the core PCE deflator touching the Fed’s target, there was a risk that the CPI wouldn’t show the same improvement.  Economists had forecasted that the consumer inflation measure would rise to 3.9% year-over-year.  That’s exactly where it was reported, and the month-over-month core registered 0.4%.  Despite matching the forecast, traders seemingly weren’t prepared for that result because yields across the curve skyrocketed.  Obviously, the report took the possibility of an early Fed rate cut off the table.  Fed fund futures are now indicating that the first cut has been pushed off to this summer.  The 2-year note, which had traded as low as 4.14% last month, shot up to 4.65% on the news, before closing the week half of a basis point higher at 4.655%.  The inflation news also took the “wind out of the sails” of the equity market, with the S&P 500 plunging 68 points by the close of business on Tuesday.  That entire move has been erased though, with the index closing roughly unchanged for the week.

Stocks and bonds partially reversed on Thursday with the release of the Retail Sales report for January.  Economists had been expecting sales to downshift from the healthy pace registered in December, but instead sales in January plunged.  Month-over-month sales fell -0.8% and December sales were revised lower, to 0.4% from the 0.6% gain originally reported.  We wondered if the falloff wasn’t a delayed reaction to the resumption of student loan repayment.  After a multiyear hiatus, borrowers were required to begin repaying on October 1st.   There was a -0.3% drop in retail sales in October followed by no growth in November, then a 0.4% uptick in December.  The weak trend could be coincidental, but more likely it’s another example of unintended consequences of short-sighted policy change.

On Friday, the Producer Price Index told a similar story to the CPI.  Core PPI rose 0.5% month-over-month, well above the 0.1% expectation.  We would describe PPI as a second-tier economic indicator, but given the sharp uptick in prices, we believe it confirms the uptick in CPI released earlier in the week.

Despite the disappointing inflation news, San Francisco Fed President Mary Daly, in a speech hosted by the National Association for Business Economics, said that she thought three rate cuts this year is a “reasonable” baseline.  Given the robust jobs market and stubborn inflation, we find her comments out of touch with the current economic reality.

Next week there will be a dearth of economic data, with only the minutes of the January FOMC meeting offering the potential to move the markets.  Contributing to what is expected to be low volatility trading sessions, the U.S. will be celebrating Presidents Day, which is synonymous with winter ski vacation.