Last week the stock and bond markets moved lower. The only asset class with gains was commodities. A few markets continued their moves higher from last December, though — more on both in a bit.
Economic data last week was disappointing, and the markets responded accordingly. Both the February Consumer Price Index and February Producer Price Index inflation measures rose more than expected, and in turn longer-term interest rates moved higher by nearly ¼ of 1% last week. Ten-year Treasuries yields are now back to the 2024 highs over 4.3%. It is also notable that 10-year yields have shown a steady progression higher since their lows last December. So far, this has not negatively impacted the overall stock market.
Another disappointing report last week was February Retail Sales. While the headline growth did come in slightly below expectations, there were revisions lower in prior data. For example, sales excluding autos, building materials, and gas rose 0.1% but were down 0.5% including revisions to prior months. This data is a key input in GDP. Moving forward, if this data is unchanged in March, these sales will be down at a 0.7% annual rate in Q1 versus the Q4 average. That would be the first quarterly decline since the COVID lockdowns.
Given the data last week, the term stagflation appeared in the financial media a few times. Though last week’s economic data might have leaned in that direction, the current economic conditions do not even come close to qualifying as a stagflationary environment. At least not yet. First, unemployment is low. In fact, if we get a several more months of the unemployment rate below 4%, that would be the longest stretch of unemployment below 4% since the early 1950s. Second, inflation, as least defined by the Consumer Price Index, remains below the CPI long-term average (since 1947) (3.2% vs 3.5%).
This week the Federal Reserve meets on Wednesday. Do not expect any rate changes. Coming into the week, Fed Funds are pricing in a 99% likelihood of the central bank keeping interest rates unchanged, according to the CME FedWatch Tool. That said, the Fed’s latest Summary of Economic Projections could shift market expectations. The market currently expects the Fed to cut the rate three times this year. The inflation data is not helping that expectation. Nor are gasoline prices, which have steadily moved nearly 40% higher since their lows last December. So far, this also has not negatively impacted the overall stock market.
Other items of note this week include an IPO of Reddit Thursday. The IPO market has been quiet of late, but given bullish investor sentiment this year, will the IPO be successful? This does have the potential to be market moving. In other tech news to start the week, Apple is in talks to license Google's Gemini for generative AI. This has given Alphabet (i.e. Google) a big start to the week. Also, Nvidia is having its annual GTC Conference early in the week. Some call this conference the “AI Woodstock.” Given investor expectations for NVDA and AI in general, news flow from this conference could also impact the market.
Bottom line:
Stay invested. Stay diversified. Stay disciplined.