Investors were on edge Thursday and Friday after the January Producer Price Index came in higher than expected and St. Louis Federal Reserve President James Bullard urged a half-point rate hike. This week’s CPI report showed that from December to January, wholesale prices rose 0.7% — the largest one-month inflation since June of last year and an increase that would translate to an annual rate of nearly 9%.[0] Annual inflation fell to 6%, which is still higher than economists expected.[1]
Markets were already jittery with the prospect of interest rates staying higher for longer and deepening geopolitical tensions, and the hawkish inflation data pushed them lower. US equity-index futures and European stocks fell, and the dollar gained on haven appeal.[2] Contract on the S&P 500 and Nasdaq 100 indexes dropped at least 0.7%, and the Dow Jones industrial average fell 431 points, or 1.3%.[2]
The Federal Reserve has raised rates eight straight times in less than a year, and Fed leaders are planning for a few more hikes of that scale, and then they’ll hold for a while and let high rates take hold.[3] On Monday afternoon, markets put the probability of the Fed raising interest rates by three quarter-points, to a range of 5.25%-5.5%, at just over 50%.[4]
Fed Chair Jerome H. Powell said last Monday at the Economic Club of D.C. that the expectation of inflation going away quickly and painlessly is “not guaranteed”, and it will take some time.[5] Cleveland Fed President Loretta Mester on Thursday admitted she saw a “compelling” case for a second half-point rate hike earlier this month, rather than the quarter-point hike ultimately authorized.[6] She said she welcomes the moderation in inflation readings since last summer, but cautioned, “The level of inflation matters, and it is still too high.”[1]
The Nasdaq Composite closed up 0.6% at 11,960, while the S&P 500 shed 0.03% to 4,136, and the Dow Jones Industrial Average slipped 0.5% to 34,089.[7] Twilio (TWLO) has gained an impressive +18% following the announcement of its Q4 revenue of $1.02 billion, which exceeded the expected $1.00 billion, and the authorization of a $1 billion share repurchase plan.[6]
0. “U.S. Treasury yields slip as investors digest inflation data” CNBC, 17 Feb. 2023, https://www.cnbc.com/2023/02/17/us-treasury-yields-investors-digest-inflation-data.html
1. “Dow Falls 400 Points After Fed Official Warns Hot Inflation Data Serves As ‘Cautionary Tale’” Forbes, 16 Feb. 2023, https://www.forbes.com/sites/jonathanponciano/2023/02/16/dow-falls-400-points-after-fed-official-warns-hot-inflation-data-serves-as-cautionary-tale/
2. “Stock Market Today: Dow, S&P Live Updates for February 21, 2023” Bloomberg, 20 Feb. 2023, https://www.bloomberg.com/news/articles/2023-02-20/asia-stocks-futures-mixed-us-contracts-edge-lower-markets-wrap
3. “CPI: Prices rise 6.4 percent in January, seventh month of easing inflation” The Washington Post, 14 Feb. 2023, https://www.washingtonpost.com/business/2023/02/14/inflation-easing-cpi-january/
4. “Fade The CPI; Here’s What Matters To The Fed, S&P 500” Investor’s Business Daily, 13 Feb. 2023, https://www.investors.com/news/economy/fade-the-cpi-inflation-report-what-matters-to-the-fed-sp-500
5. “Inflation data will test ‘disinflation’ optimism: What to know this week” Yahoo News, 12 Feb. 2023, https://news.yahoo.com/stock-market-week-ahead-consumer-price-index-inflation-retail-sales-172419890.html
6. “Strength in U.S. Producer Prices and Hawkish Fed Speak Weighs on Stocks” Barchart, 16 Feb. 2023, https://www.barchart.com/story/news/14274433/strength-in-u-s-producer-prices-and-hawkish-fed-speak-weighs-on-stocks
7. “S&P 500, Dow, Nasdaq finish mixed as Fed debate continues” Seeking Alpha, 17 Feb. 2023, https://seekingalpha.com/news/3937828-sp-500-dow-nasdaq-finish-mixed-as-fed-debate-continues