By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: Jan. 14, 2022

Jan 14, 2022 | 1:58 PM

Big Picture

Markets Struggle for Traction as U.S. Inflation Continues to Rise

The Dow and S&P 500 lost ground Monday as U.S. 10-year Treasurys climbed to 1.78%, their highest level since January 2020 — a clear sign that investors expect Jerome Powell and the Fed to move quickly in raising interest rates. Bucking the trend was the Nasdaq, which mounted a late-session comeback, ending the day with a seven-point gain, while the TSX surrendered 12 points.

All three major U.S. indexes gained ground on Tuesday, with the Nasdaq leading the way, as investors appeared comforted by Powell’s testimony to Congress on Tuesday, in which he reiterated his pledge to move aggressively to cool inflation. By Tuesday’s close, the Nasdaq jumped 210 points, while Dow and S&P rose 183 and 43 points, respectively. The TSX added 202 points, with energy stocks and financials leading advancers.

Although U.S. inflation hit its fastest pace since 1982, North American markets seemed to take the news in stride, registering modest gains by Wednesday’s close. Data released Wednesday showed that the U.S. consumer-price index rose 7% in December, year-over-year, up from 6.8% in November. December marks the third straight month in which U.S. inflation has exceeded 6%. Meanwhile, 10-year U.S. Treasury yields dropped 3 basis points on Wednesday, down to 1.72% — a further sign that the inflation numbers were largely in line with expectations.

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However, technology stocks once again dragged down U.S. indexes on Thursday, as investors continue to sift through the latest U.S. inflation data. Also weighing on markets was the latest U.S. jobs data, which showed initial jobless claims rose to 230,000, higher than economists’ expectations. By Thursday’s close, the Nasdaq dropped more than 2.5%, surrendering 381 points, while the Dow and S&P 500 dropped 176 and 67 points, respectively. In Canada, the TSX declined 102 points, on weakness in the energy and materials sectors. Finally, the loonie strengthened for a third straight day against the U.S. dollar, hitting 80.25 U.S. cents on Thursday, its strongest level in two months.

U.S. Markets Lose Ground, TSX Advances

For the four trading days covered in this report, the Dow lost 118 points to close at 36,113, the S&P 500 dropped 18 points to settle at 4,659, while the technology-heavy Nasdaq declined 129 points to close at 14,807. In Canada, the TSX gained 209 points to end at 21,293.

Strategy

Consumer prices continue to climb, showing strong demand and supply bottlenecks still at play

U.S. CPI rose at its quickest rate since 1982 in December, climbing 7% on a year-over-year basis. Although the headline rate has likely peaked, core CPI inflation increased to 5.5% last month and will continue to rise over the coming months. Headline consumer prices increased by 0.5% on a month-over-month basis, benefitting from a temporary slide in energy prices and modestly weaker gains in food prices. Indeed, gasoline prices fell by 0.5% on the month, and piped gas prices fell by 1.2% over the same period, reflecting the drop in the spot commodity prices. With crude oil prices rebounding meaningfully in recent days, gasoline prices will likely rise again in January. Excluding food and energy, core prices were up 0.6% in December. Used vehicle prices increased by 3.5%, and new vehicle prices increased by 1.0%. While easing of chip shortages and rebounding production suggests that those price pressures will eventually reduce, it might take some time. The omicron variant has dented travel and leisure demand but has yet to show up in related prices. Recreation services only edged down 0.2%, public transportation rose strongly at 2.0%, and restaurants increased prices by 0.6% in December. Overall, we think the inflation trajectory over the next few months will likely depend on whether the impact of renewed supply chain disruptions outstrips that of lower demand for discretionary services.

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