February 11, 2022

Weekly Market Commentary February 7th to February 11th 2022

The week was light on data but big on impact. Inflation continues to be the lead story in the economy and the calls for Fed tightening are growing louder. We expect this will likely continue through the end of winter and into the spring as consumer confidence (and spending power) slowly erodes.

The monthly Consumer Price Index for January was released on Thursday and the markets reacted quickly. Consensus called for a +0.4% increase which would be in line with those suggesting that inflation is improving. What we got, however, was an actual number of +0.6%. The difference is minor mathematically, but it suggests that prices are continuing to go up. In other words, inflation is getting worse which must be concerning to the Federal Reserve Board. The year-over-year figure also surprised to the upside coming in at +7.5% when consensus called for +7.2%.

This painstakingly high inflation has caused the Fed to rethink its approach on when to boost short term interest rates – their main tool for maintaining economic stability. If you recall from this space in the fall, we mentioned several times how the Fed claimed that inflation was ‘transitory’ and that they were not ready to end quantitative easing, the program which got us out of the last recession. Now that it seems inflation is here to stay and the employment situation has stabilized, the Fed has signaled that they are ready to begin tightening. Look for three to four rate increases between now and the end of the year as the Fed tries to get inflation in line. Although investors generally don’t like rate increases, it is a signal that the economy is strong, and that the Fed believes it can handle tighter financial conditions. Remember, the Fed’s mandate is employment stabilization (we have that) and inflation at around 2% (we most definitely do not have that) so most economists believe it’s time for higher rates. The pace of rate increases is where the deliberation is currently occurring.

Elsewhere in the economy this week, initial jobless claims came in slightly under expectations at 223,000; and the University of Michigan Consumer Confidence Index hit a ten year low at 61.7 when consensus was calling for 67. Clearly, higher prices and evaporating government stimulus have not only hit consumers’ wallets, but also their psyche. We continue to believe that as the Fed starts to tighten and the supply chain kinks continue to be worked out, consumer sentiment will begin to improve.

Coming off last week’s bounce back, equity markets took the bad news about inflation as expected and retreated. The broad-based S&P 500 dropped -1.8%, the Dow Jones Industrials Average declined -1.0%, and the tech-heavy NASDAQ finished down -2.2%.

In the fixed income markets, short yields were up again while longer yields were flat on the week. The 2-Year, 10-Year, and 30-Year US Treasury yields finished the week at 1.49%, 1.92%, and 2.23% respectively.

Key economic releases next week include Producer Prices; Retail Sales; Industrial Production and Capacity Utilization; Housing Starts and Building Permits; and Existing Home Sales.

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