The futures market points to a generally weak open to today’s stock trading. Investors are digesting key economic data released this morning. The U.S. Bureau of Labor Statistics reported updated figures on inflation. For January, the headline Producer Price Index (PPI) showed a 0.3% monthly advance, versus a 0.2% contraction in the final 31days of 2023. Year on year, the index gained 0.9%, compared to a 1.0% increase in the prior reading. Core PPI, adjusted for volatile food and energy prices, rose 0.5%, month to month; it fell 0.1% in December. The adjusted index number was up 2.0%, year to year, above the last reported result of 1.7%.
Following the recently disappointing Consumer Price Index (CPI) showing, the PPI has renewed concerns that the Federal Reserve may have more work to do in containing inflation. The persistent strength in prices, though, could be due to seasonal factors. Upcoming data releases will probably continue to display some choppiness, but we do believe inflation will calm through this year.
Around the same time that the PPI numbers came out, the U.S. Census Bureau published information on the housing sector. New housing construction starts tallied 1.33 million in January, down from 1.46 million in December. Building permit applications came in at 1.47 million, versus 1.50 million previously. Up until recently there has been a good measure of relief in the sector, thanks to lower mortgage rates, relative to 2019. Lately, however, those rates have modestly risen, bringing a bit of pressure on the sector. Housing demand still outstrips availability by a wide margin. Builders are offering rate buy-downs to help purchasers, especially first timers, to move into new homes. Expectations that the Federal Reserve will cut short-term interest rates this year suggest a strengthening of the sector, as well as in the broader capital-investment market.
Shortly, the University of Michigan will unveil its consumer sentiment survey for this month. A preliminary reading of 80.0 is expected, up marginally from the final 79.0 level reached in January. The survey has shown improvement since hitting a low of 61.3 in November of last year. A peak reading above 100 was reported in early 2020. Currently, the U.S. economy is in decent shape, and consumers finally seem to realize this, despite lingering pressure from elevated services and goods prices and borrowing rates. There are more job openings than people searching for them. More people seem to be entering the market, but most that are gainfully employed are not looking for alternatives. Wages remain healthy, and have underpinned consumer spending. We note, though, that retail spending has softened from strong levels in past months, as many economists have been expecting. Consumers are drawing on pandemic-related savings and beginning to rely more on their credit cards for necessities and discretionary items.
For all of this trading week, stocks might be hard pressed to achieve gains. The stronger-than-expected CPI and PPI numbers, along with disappointing retail sales in January, have restrained overall share-price progress. The current corporate earnings season is winding down, and decent results have helped to shore up stock valuations. Technology stocks’ price momentum has faded a bit in recent days, while the Standard & Poor’s 500 Index and the Dow Jones Industrial Average have held up comparatively well.
Next week, new data will roll in on leading economic indicators, initial jobless claims, Standard & Poor’s flash services and manufacturing purchasing managers indexes, and existing home sales. Too, the minutes from the Federal Open Market Committee’s January meeting will be released. The central bank is closely monitoring economic trends, and will decide on the pace of possible cuts to the federal funds rate (now 5.25%-5.50%) over the coming months. Up to now, officials have guided for three one-quarter-point reductions, likely in the second half of 2024.
There remains a good degree of uncertainty, economically and politically, this year. Accordingly we won’t be surprised if share-price volatility picks up. Portfolio diversification is a wise strategy in this environment. - David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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