Benefit of doubt...
Quick summary:
NOTE: apologies for the blog being late, it was good to go, but not scheduled in time. Anyway, the Q1 competition is up & running - click here to join the action.
January's CPI and PPI reports both exceeded expectations, with the CPI increasing by 0.5% monthly and 3% annually, and the PPI recording 3.5% and 3.6% increases in headline and core rates, respectively.
Despite the uptick in inflation, over the past few months, the 10-year Treasury yield went down, moving from near 5% to 4.5%, indicating that the markets might be giving the Trump administration benefit of doubt. This was clearly shown last week as despite the uptick in inflation, and despite a new announcement on tariffs, markets went up.
This week, look to the the January FOMC minutes on Wednesday, and a number of data reports: services, manufacturing, housing and building permits, consumer sentiment. Still earnings season, retailers report this week. NVDA comes in the week after.
Over the weekend, we examined the probabilities of the markets hitting its upper technical level and bouncing off it, or whether they push through in a blow-off top scenario. Waiting for a catalyst either way. Subscribe to read the full analysis if you missed it, plenty more coming up!
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Last week’s performance
With January's CPI increasing by 0.5%, pushing the annual rate to 3%. Core inflation also rose by 0.4% for the month, culminating in a 3.3% year-over-year increase, all exceeding forecasts. The PPI mirrored this trend, with headline and core rates climbing to 3.5% and 3.6%, respectively, both above the anticipated 3.3%. Significant increases were noted in the costs of shelter, utilities, and essentials such as eggs, beef, and milk, affecting consumer budgets. Despite these inflationary pressures and the announcement of new tariffs on intermediary goods by President Trump, the markets responded with a volatility-driven relief rally, rather than panic, indicating a complex interplay of market expectations and reactions.
Moreover, the bond market showed signs of easing, with the 10-year Treasury yield retracting from near 5% to 4.5% over the past two months, which suggests that markets might be giving the Trump administration benefit of doubt in that inflation might not end up being a problem after all.
This surprised our forecasts as well; as our signal was a sell, which was an apt prediction in a week where two inflation prints were hotter than expected. However, the market doesn’t always listen!
This week, following the Presidents Day holiday, the focus will shift to the Federal Reserve with the release of the January meeting minutes on Wednesday. Economic indicators such as housing market data and manufacturing statistics will also be closely watched, offering additional perspectives on the state of the economy.
Next week we get NVDA earnings, so probably not a lot of action this week. But as aforementioned, the market doens’t always listen.
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