By Scotia Wealth Management - The Zukiwsky Group

Market Watch: Feb. 17, 2023

Feb 17, 2023 | 3:41 PM

Big Picture

More Fed Hikes a Possibility as U.S. Inflation Falls Less Than Expected

Wall Street indexes closed sharply higher on Monday as investors anxiously awaited Tuesday’s inflation data. Gains were broad-based Monday, with every S&P 500 sector, except energy, closing higher. By Monday’s close, the Dow jumped 377 points, while the S&P 500 and Nasdaq added 47 and 174 points, respectively. Meanwhile the TSX added 90 points, helped by gains in the tech and consumer discretionary sectors. North American markets were mixed on Tuesday after a report showed U.S. inflation is continuing to slow, but perhaps not as quickly as expected. The U.S. consumer price index showed annual inflation cooled to 6.4% last month, slightly above economists’ expectations. The S&P 500 and TSX finished flat on Tuesday, while the Dow dropped 157 points, and the Nasdaq added 68. U.S. stocks wavered in early trading Wednesday after data showed that U.S. retail sales rose 3% in January, bouncing back from recent declines as jobs growth accelerated. While that’s good news for the U.S. economy, investors fear the latest data might mean the Fed will be forced to keep rates higher for longer. By Wednesday’s close, the Dow and S&P 500 registered minor gains, while the Nasdaq rose 110 points. In Canada, the TSX inched up 16 points, despite materials and energy weakness. North American equity markets fell sharply Thursday after inflation and jobs data came in hotter than expected, increasing concerns that the Fed will be forced to continue hiking interest rates. According to the U.S. Labor Department, supplier prices rose 0.7% in January from the prior month, the biggest gain since last summer. Meanwhile, jobless–claims data showed little signs of the U.S. labor market cooling. By Thursday’s close, the Dow tumbled 431 points, while the S&P 500 and Nasdaq fell 57 and 215 points, respectively. It was also a down day for the TSX, which lost 114 points.

A Mixed Week for N.A. Indexes

For the four trading days covered in this report, the Dow lost 172 points to close at 33,697 the S&P 500 was unchanged for the week, ending at 4,090, while the tech-heavy Nasdaq rose 138 points to close at 11,856. In Canada, the TSX lost just 6 points to end at 20,606.

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Strategy

Price pressures in the U.S. remain persistent

Price pressures in the U.S. remained elevated in January, with annual CPI rising by 6.4% (6.2% expected) and core CPI by 5.6% (5.5% expected). Inflation rose 0.5% on a month-over-month basis as well, with upward pressure from food (+0.5%), gasoline (+2.4%), and shelter (+0.7%). Excluding the volatile food and energy categories, prices rose 0.4% on the month. The core services ex. housing category that the Fed closely watches ticked lower to 0.3% from 0.4% previously. Much of the disinflation in recent months came from the goods side, but the category gained momentum in January. Core goods rose 0.1% month-over-month after a 0.1% contraction in December. Goods such as household furnishings (+0.5%) and apparel (+0.8%) started to pick up again as consumer demand remained firm. If goods inflation starts to rise again, then the disinflationary impulse will need to come from services, though there has been little indication of this so far. From a monetary policy standpoint, the Fed will have the opportunity to assess another CPI and labour market report before its next meeting. While we think it is unlikely that policymakers will speed up the pace of monetary tightening, another elevated inflation reading could lead to additional rate hikes. The futures market had already been pricing in a 25 bps increase for each of the March and May meetings. Today’s data has also upped the probability of a June hike. Three additional rate increases would take the Fed Funds rate to 5.5%, well above the median estimate in the Fed’s latest forecast.

Disclaimer

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Feb. 17, 2023

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