Hello, this is Claire Ellerhorst, Private Bank Investment Strategist at Fifth Third Bank with this week’s Economic Beat.
Major U.S. equity indices were lower last week as investors continued to assess surging inflation and a more hawkish Federal Reserve. The S&P 500 Index fell 1.8% in total return, while the tech-heavy Nasdaq 100 dropped 2.2% for the week. The blue-chip Dow Jones Industrial Average lost 1.0%. The U.S. 10-year Treasury yield rose 3 basis points to end at 1.94% and the yield curve flattened. The benchmark yield closed above two percent on Thursday for the first time since 2019. International equities rose for the week and the U.S. dollar strengthened against major peers.
The big focus on the U.S. economic calendar was the January consumer price index (CPI) release. January headline CPI was up 7.5% year-over-year, the highest in four decades and faster than anticipated by economists. Core CPI, which excludes volatile food and energy prices, rose 6.0% from a year earlier. Travel and transportation were among the categories that showed an unexpected increase, despite virus-related pressures. We continue to observe signs that inflation may be reaching a peak, including an unchanged monthly reading on new auto prices for January and the smallest increase since September on used autos, though still elevated. A shrinking backlog at California ports and optimistic commentary around semiconductor chip shortages may be pointing to peak supply chain issues, which in turn could relieve inflationary pressures.
Still, the inflation reading reinforces expectations for a Federal Reserve rate hike in March and betting markets are now showing increased odds for a 50 basis point hike, twice the typical magnitude. St. Louis Fed President James Bullard said he now prefers a 50 basis point hike and a total of 100 basis points by July. Other Fed officials were more skeptical of moving this quickly. Fed funds futures now imply more than six 25 basis point rate hikes by the end of the year. Even in the most aggressive of estimates, the Fed Funds rate would still end the year below the level of expected inflation and growth.
Stocks had been moving higher early in the week but sold off on Friday amid reports that Russia could invade Ukraine as early as this week. Meanwhile, on the U.S.-Canada border, protestors have been blocking the Ambassador Bridge between Detroit and Windsor, Ontario, the busiest border crossing in North America. The truckers demonstrating are opposed to Canada’s new rule requiring them to be fully vaccinated when crossing the border or face a two-week quarantine. The protest has also drawn supporters resisting other virus-related restrictions. Windsor Police began making arrests over the weekend, but traffic into Canada was still suspended as of Sunday morning.
In the week ahead, geopolitical tensions will remain in the headlines as the U.S. and other major nations continue attempts to deescalate friction between Russia and Ukraine. On the economic calendar, the producer price index is expected to reiterate strong inflation in January, though perhaps will show a continued deceleration. Retail sales are expected to have rebounded in January after a decline in December. Industrial production, housing data and minutes from the latest Federal Reserve meeting are also released.
As always, we’ll be watching and reporting back to you. Thank you.