Boy oh boy — literally one week from one of the most disastrous weeks of stock market trading, including two quadruple-point drops in the Dow, one of which was the index’s biggest point-drop in history, we now sit atop a week that may be the best performer for the Dow since November 2016. For the S&P 500, we may be seeing the strongest single week of trading since 2011.
So what’s changed in that amount of time? Have there been Q4 earnings reports or economic data that have helped investors change course directly? No — not even close. If anything, the initial fears of heavy inflation hitting the market following the January non-farm payroll report two weeks ago have been nothing if not somewhat justified.
This week, we saw both the Consumer Price Index (CPI) and Producer Price Index (PPI) reads come in hotter than expected, indicating inflation has already begun to seep into the economy. Retail Sales fell in their latest report, though prices for things like gasoline spiked. (There’s a reason gasoline prices are stripped from the “core” read, however: they are historically more volatile, as are food prices.)
For today’s contribution to the macro picture, Housing Starts for January ramped up 9.7% from a -6.9% read in December, and more than twice as hot as the +4.2% we had been expecting. Building Permits, a forward indicator on future Housing Starts, reached 1.396 million, up 7.4% — higher than the 0.8% expected and from the previous month’s (slightly revised lower) seasonally adjusted annualized units.
Also, Import/Export Prices came in hotter than expected as well: 1.0% on Imports (+0.6% was expected) and 3.4% on Exports. Subtracting petroleum prices for Imports, that figure remains higher than expected at +0.5%. Year over year, Imports are up 3.6%. Yet more indicators that inflation is clear and present in today’s economy, and no longer something theoretical to consider for some other day.
Until we see investors turn toward 10-year bonds, we can expect their yield to climb. What once wallowed down in the 2.3-2.4% territory just a few short months ago now has blossomed into the 2.8s of late, even crossing above 21.9% for a moment yesterday.
None of this seems unmanageable, however, which is perhaps the reason for lack of heavy concern — at least relative to last week’s stock market hysteria. We hadn’t experienced market turbulence at all for well over a year until just last week, so when it hit we all felt the impact. But just like the jumbo jet sailing across the sky, once a new equilibrium is reached we can once again enjoy some calm. At least until next time…