Trepp | Market Pulse: How will the Fed see the Forest when the Trees are Giving Mixed Signs

Last week was heavy on the economic data front, with inflation indicators and quarterly earnings reports galore. The three major equities indices saw weekly gains, with the S&P 500 nearing its record-high of just under 4,800 which the index reached about two years ago. 

The S&P 500 ended last week up 1.84%. The 10-year Treasury yield finished last week down about 10 basis points to 3.94% and the 2-year was down almost 27 basis points to 4.14%, putting the 2s/10s spread at 19 basis points inverted.

Let’s explore last week’s wealth of economic data.

CPI Hotter than Expected

• The Consumer Price Index (CPI) increased 0.3% month-over-month (MoM) in December and 3.4% year-over-year (YoY), which were higher than the expected MoM and YoY changes of 0.2% and 3.2%, respectively.
• Removing volatile food and energy prices from the calculation, the “core CPI” also rose 0.3% MoM, which was in line with the expected 0.3% MoM increase.
• Annually, the core CPI rose 3.9%, higher than the 3.8% anticipated increase.
• Most of the increase in the CPI reportedly came from rising shelter costs.

PPI Continues to Fall for Third Consecutive Month

• Wholesale prices, as indicated by the Producer Price Index (PPI), fell 0.1% in December, contrasting with the previous day’s hotter CPI figures. Market participants were largely expecting a 0.1% increase MoM in the PPI.
• December’s figure is in line with November’s monthly revised reading of a 0.1% drop. October had seen a 0.4% drop in wholesale prices, driven by energy and gas price declines.
• Annually, the PPI rose 1% in December, which is slightly higher than November’s revised reading of a 0.8% annual increase. For comparison, December 2022 posted an annual wholesale inflation rate of 6.4%.
• Taking out volatile food, energy, and trade categories, the core PPI figure was basically flat for the month, rising a mild 0.2%.

Kicking Off Earnings Season

• Several big banks, JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup released their Q4 bank earnings. Earnings were mixed but largely weaker than expected, causing bank stocks to slip.
• BlackRock, however, beat Q4 expectations and announced its $12.5 billion acquisition of Global Infrastructure Partners.
• Delta Air Lines also reported its earnings, where the company retreated on its profit targets for 2024 due to higher costs counteracting gains from the rebound in travel.
• UnitedHealth Group’s Q4 release reported soaring medical costs.

Wholesale prices point to cooling inflation, but consumer prices are less encouraging and are still a long way away from the Fed’s 2% inflation target. War in the Middle East is also coming into play, putting downward pressure on stocks and upward pressure on crude prices.

With the Fed’s next meeting approaching at the end of January, the markets anticipate which data points will drive the Fed’s next policy decision. In other words, how will the Fed see the forest for the trees in order to make their next rate move?

The probability of a 25 basis point rate cut in the Fed’s March meeting has climbed to 75.4%, according to the CME FedWatch Tool, with about half of the gain from last week’s 64.0% being driven by Friday’s data releases. Furthermore, Personal Consumption Expenditures data will be released in 2 weeks, another key indicator to play a role in the Fed’s month-end decision.

This week, keep an eye out for data on housing, including building permits, housing starts, and existing home sales, as well as retail sales and the Philly Fed Manufacturing Index.

CMBS Update

Last week, trading on the secondary market was light with less than $190 million in BWIC volume. CMBX 7-15 AAA came in about 0.1-7.2 basis points. CMBX 7 BBB- widened by about 8,532 basis points. CMBX 8-15 BBB- tightened about 14- 134 basis points.

Compliments of Trepp – An Executive Member of the EACCNY