This morning, the attention of Wall Street is on the U.S. economy with several important reports released before the opening bell. The headline data came from the Labor Department and was another indication that the Federal Reserve’s battle to tame inflation remains arduous. Specifically, we learned that the Producer Price Index (PPI) rose 0.7% in January, and when excluding the more volatile food and energy components, core producer (wholesale) prices climbed 0.5%. On a 12-month basis, the PPI and core-PPI increased 6.0% and 5.4%, respectively. These figures were stronger than expected and a sign that inflation is still running well above the Fed’s comfort level. The equity futures, which were moving lower heading into the PPI report, took another step down. Overall, the Dow Jones Industrials, NASDAQ, and S&P 500 futures were down 0.5%, 1.0%, and 0.8%, respectively, shortly after the economic releases.
The PPI data headlines a very busy day of economic news. We also learned that respective housing starts and building permits fell 4.5% and 0.1% on a sequential basis and were down 21.4% and 27.3% year over year. The residential construction sector, a major contributor to the nation’s gross domestic product, has been hurt by higher mortgage rates, which have crimped demand for housing, and elevated prices for building materials. Slowing down demand for housing and the resultant high home prices, which climbed to record highs during the pandemic-driven low-borrowing cost environment, is a major part of the Fed’s plan to rein in prices.
Two other noteworthy reports this morning were initial unemployment claims for the week ending February 11th, which were down nominally from the previous week’s figure, to 194,000, and the latest Philadelphia Fed manufacturing survey. The latter produced a reading of -24.3, which came in below expectations and was the worst reading since last May. That, combined with yesterday’s disappointing industrial production data, reflects a weakening manufacturing sector.
As noted, the economic data over the last fortnight have been closely watched for clues as to whether the central bank’s highly restrictive monetary policy course is starting to reduce demand for goods and services and push prices lower, which is the key to the Fed winning the inflation battle. However, strong data on January jobs creation and retail sales, along with a higher-than-anticipated increase in consumer prices, suggest that inflation remains sticky. This will likely require more work from the Federal Reserve and push the federal-funds rate above 5.00% later this year. Sentiment that the central bank is likely to remain hawkish pushed Treasury market yields notably higher this month. That said, the stock market—save for the selling on the strong employment report earlier this month—has taken the thought of a more restrictive Federal Reserve in stride. Still, this backdrop could make for a very choppy performance for the U.S. market indexes this year.
On point, many of the higher-growth, unprofitable technology companies that struggled mightily in 2022 have received some support so far this year. After the closing bell yesterday, a number of such companies reported better-than-expected quarterly results, and their stocks are rising in pre-market action. This group includes streaming service provider Roku (ROKU), online real estate company Zillow (Z), and business-to-business customer engagement platform company Twilio (TWLO). However, there was a dour reaction to the latest quarterly results from media company Paramount Global (PARA) and online marketplace Shopify (SHOP).
With earnings season starting to wind down (more than 75% of the S&P 500 companies have reported), the results have been mixed, but not dour enough to worry the market. That said, those companies that have disappointed and lowered their prognostications for coming quarters have, in many cases, been punished by Wall Street, most notably Alphabet (GOOG), the parent company of technology behemoth Google. Conversely, shares of Cisco Systems (CSCO) is rallying in pre-market action today after the technology giant beat top- and bottom-line estimates in the latest quarter and announced an increase to its dividend.
From a sector perspective, the consumer discretionary industry continues to rally, helped by yesterday’s strong January retail sales report. The outsized job gains last month also gave a boost to this group, as investors think that this backdrop will allow the consumer to keep spending even as inflation remains a bit troublesome. Conversely, the energy and healthcare sectors have been underperformers in recent weeks, with the former hurt by yesterday’s report showing a buildup in inventories of crude oil.
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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