Hello, this is Tom Jalics, Chief Investment Strategist at Fifth Third Bank
US equities were lower in a holiday-shortened week, with the S&P and Nasdaq down for a third-straight week and both posting the worst weekly performance since early December. For the week, the Dow Jones Industrial Average fell 3.0%, the S&P 500 declined by 2.7%, and the Nasdaq Composite ended the week 3.3% lower. U.S. Treasuries yields moved sharply higher this week with the 10-year U.S. Treasury up fourteen basis points to end the week at 3.95% and the 2-year U.S. Treasury note up nineteen basis points to the end week at 4.81%. The U.S. Treasury yield curve remained deeply inverted, posting its most inverted reading since the early 1980s. The U.S. dollar index was up 1.3% versus a basket of global currencies, for a fourth straight weekly gain, posting the biggest increase since September. Gold was down 1.8% for the week ending the week at $1,811.78/ounce. West Texas Intermediate (WTI) crude oil was down 0.3% for the week, ending the week at $76.57/barrel.
Domestic stocks fell sharply following a report that inflation accelerated again as the year began. On Friday, the Commerce Department reported that its core personal consumption expenditures (PCE) price index jumped 0.6% in January, above expectations of an increase of 0.4%, the largest increase since last August. December’s figure was also revised higher, pushing the year-over-year increase, considered to be the Federal Reserve’s (Fed) preferred inflation gauge, from 4.6% to 4.7%, the first pickup in pace since September. Expectations had been for another decline to around 4.3%. Unsurprisingly, this inflation data had a large impact on expectations for future Fed rate hikes. According to CME Group data, futures markets began pricing in a roughly 27% chance of a 50-basis point hike in the Fed Funds target rate at the upcoming March policy meeting, with approximately a 38% chance that the terminal Fed Funds rate would reach a target range of 5.50% to 5.75% or higher. Concurrently, expectations that the Fed would begin cutting rates this autumn fell considerably. This new "higher for longer" market-based expectation for the Fed Funds rate is in line with the Fifth Third Bank Investment Strategy Group’s thinking. One of the lessons learned from the persistent inflation experienced in the 1970s was that a lengthy period of restrictive monetary policy was needed to keep inflation levels low and steady. It is our belief that the current Fed understands this lesson and will not make the same mistake that was made during the 1970s where monetary policy was intermittently restrictive, but not restrictive enough to cure inflation once and for all. Fed Chair Jerome Powell has made it very clear in public comments that he intends to remain restrictive on policies "…until the job is done."
This week brings another batch of high-profile economic data. Durable goods orders are out Monday, followed by consumer confidence on Tuesday. The ISM manufacturing index is released on Wednesday, and ISM services index will be revealed on Friday. A busy week of Fed speak includes comments from Fed Governor Jefferson on Monday, Chicago's Goolsbee on Tuesday, Governor Waller on Thursday, and Dallas' Logan on Friday. And finally, investors will get a chance to digest more earnings reports from U.S. corporations this week with Target, Lowe’s, Costco, Salesforce, Zoom Video Communications, Broadcom, Hewlett Packard, Dell Technologies, TD Bank, Best Buy, and AutoZone, among others.
As always, we will be watching and reporting to you next week. Thank you.
