This morning, the attention of Wall Street will be on the U.S. inflation situation. That is because at 8:30 A.M. (EST), the Labor Department released its December report on the Consumer Price Index (CPI). Specifically, the CPI and the core CPI, which excludes the more-volatile food and energy components, both increased 0.3% on a month-to-month basis, which was a bit higher than expected. From a 12-month perspective, the CPI and core CPI rose 3.4% and 3.9%, respectively. The encouraging sign was that the 12-month core CPI came in below 4.0% for the first time since May of 2021. The report did not change the narrative that inflation remains on a gradual downward trajectory, but the bumpy nature of the data may suggest that the Fed will need to keep interest rates high for longer than Wall Street recently anticipated.
The CPI data was not the only economic report watched by investors today. We also learned that initial jobless claims for the week ending January 6th totaled 202,000. It was the lowest level since October of 2023, and when combined with data showing a drop in continuing claims, to 1.834 million, suggests labor market conditions remain tight. Before the opening of the market tomorrow, investors will receive another important report from the Labor Department on December producer (wholesale) prices. The equity futures, which were nominally higher heading into the CPI release, are now presaging a mixed opening for the stock market stateside, as investors continue to digest the latest CPI report. It should be noted that the yield on the 10-year Treasury note, which moved higher on the CPI data, has finished above 4.00% for five-consecutive trading days.
Tomorrow also will bring the commencement of fourth-quarter earnings season, with the latest results from banking giant JPMorgan Chase (JPM) kicking off the festivities. The JPM report leads a number of important releases from the banking industry over the next week. These reports will be closely monitored by the Federal Reserve and Wall Street to get a better sense of how the lending institutions are doing in this higher interest-rate environment. The results and commentary from the banks’ leadership also will provide some insight into the current health of the U.S. economy. On Tuesday, the World Bank forecasted a “soft landing” for the U.S. economy in 2024. From an investment perspective, it should be noted that the performance of the bank stocks was driven by interest-rate sentiment in 2023, and we don’t anticipate that changing in the new year. This was particularly true for the shares of the smaller regional lenders.
In general, the fourth-quarter earnings season is expected to be highly scrutinized by investors. That is because with valuations for S&P 500 companies looking quite frothy following a nine-week winning streak for the major indexes to end 2023, we think solid earnings growth will be needed to justify the premiums now being paid to own equities. Given this backdrop—and the recent upswing in Treasury market yields—we continue to prefer the stocks of high-quality companies that have a history of generating steady earnings and cash flow growth, especially when economic growth may be starting to slow.
It is also worth noting that the technology stocks, after a phenomenal performance in 2023 that powered a 43% gain for the NASDAQ Composite, have been more volatile to start 2024. The primary culprit has been the renewed strength in Treasury market yields year to date. The yield on the 10-year Treasury note, which fell more than a full percentage point over the final two months of 2023, recently traded above 4.00%. This was prompted by the stronger-than-expected December labor market data and the minutes from the latest Federal Open Market Committee (FOMC) meeting, which showed that senior Fed officials still think the federal funds rate needs to stay high to effectively stamp out inflation. This threw some cold water on Wall Street’s thinking that the central bank may begin cutting rates as early as this March. With the U.S. economy still growing, albeit at a slower pace, we do not think a rate cut at the March meeting will be in the cards for Fed officials. That said, the inflation situation remains fluid and sentiment can change on a dime based on the most recent economic reports. Given this environment, we would not be overly surprised if equity market volatility picks up as 2024 unfolds. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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