Market Watch: January 13

It was an even stronger session for U.S. stocks on Wednesday, as investor optimism grew that Thursday’s inflation data would lead to a less hawkish path for the Fed. The S&P 500 gained 50 points, the Dow added 269, while the Nasdaq jumped 189 points. The TSX rose 126 points, buoyed by a strong performance in the real estate sector.

Thursday’s U.S. inflation data showed that U.S. inflation fell to 6.5 per cent in December year over year, down from 7.1 per cent in November and well below the 9.1 per cent peak seen in June. Meanwhile, Core CPI, which strips out food and energy prices, climbed 5.7 per cent in December, down from November’s 6 per cent gain. Thursday’s Labor Department data has raised expectations that the Fed will opt for a smaller 25-basis-point hike in February. The latest U.S. inflation numbers helped North American markets to solid gains on Thursday, with the energy sector posting a strong performance. By Thursday’s close, the Dow was up 216 points, the S&P 500 added 13, and the Nasdaq rose 69 points. In Canada, the TSX kept marching higher, posting a gain of 186 points. Finally, investors snapped up U.S. Treasurys, lifting bond prices and weighing on U.S. 10-year yields, which declined to 3.48 per cent on Thursday.

Markets Gain Ground

For the four trading days covered in this report, the Dow gained 560 points to close at 34,190, the S&P 500 added 88 points to settle at 3,983, while the tech-heavy Nasdaq rose 432 points to close at 11,001. In Canada, the TSX jumped 397 points to end at 20,211.

Strategy

U.S. headline inflation retreated for the sixth consecutive month

Price pressures in the U.S. showed further signs of cooling in December as the headline consumer price index (CPI) advanced 6.5 per cent year-over-year (YoY) from 7.1 per cent previously, according to data released by the Bureau of Labor Statistics (BLS). Price pressures also contracted on a month-over-month (MoM) basis, down 0.1 per cent compared to November. The drop in gasoline prices (-9.4 per cent MoM) was the main driving force behind lower prices, along with durable (-0.8 per cent) and non-durable goods (-1.2 per cent). Food prices advanced by 0.3 per cent MoM, though the pace of increase has moderated since July. Conversely, shelter, which is the largest weighted component in the CPI basket, continued to cast upward pressure on prices as it rose 0.8 per cent compared to November. Owner’s equivalent rent, defined as the hypothetical amount a homeowner could get for their house if they rented it out, rose 0.8 per cent on the month while hotel costs were up 1.7 per cent. Finally, core inflation, which excludes the volatile food and energy categories, was up 5.7 per cent YoY (6.0 per cent previously) and 0.3 per cent MoM (0.2 per cent previously).

Meanwhile, the Department of Labor also released its weekly report on jobless claims, which showed initial claims were little changed at 205,000 for the week ending January 7 while continuing claims fell to 1.634 million from 1.697 million previously. The data indicates that employers are hesitant to let go of workers despite concerns about a looming economic slowdown. Those who are let go from their place of employment are not having difficulty in finding new employment, as evidenced by the relatively low figure for continuing claims.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: January 13

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