Price Check: Choppy Trading Seen Likely as Market Prepares for Possible Uptick in CPI Data

(Monday Market Open) Between the excitement of the big game and the mystery of flying objects, it was an eventful weekend, to say the least.

Wall Street gets back to work today after an active premarket and now appears focused on tomorrow’s inflation data. Major indexes rebounded slightly in futures trading after being down moderately in the overnight session. Slight dips in the dollar and crude might be providing a bit of a tailwind. 

January Consumer Price Index (CPI) data are due before the open tomorrow, but there’s already bad news on the inflation front. Last Friday, the Labor Department upwardly revised the last three months of CPI data (more below). This could make market participants even more nervous going into tomorrow’s trading, so it could be a choppy trading environment today following the choppiness that emerged last week.

Highlights this week, besides CPI, include expected earnings from Cisco (CSCO), Airbnb (ABNB), Shopify (SHOP), Coca-Cola (KO), and Deere (DE). There’ve been some signs of travel demand dipping recently, so ABNB’s earnings tomorrow could be a chance to see if that’s actually a trend.

Wednesday’s January Retail Sales data could also move the market. A disappointing December reading caused alarm. There’s no important economic data today.

Morning rush

• The 10-year Treasury yield (TNX) fell to just below 3.74%, still near one-month highs.
• The U.S. Dollar Index ($DXY) is at 103.55, about flat.
• Cboe Volatility Index® (VIX) scooted higher, to 21.29.
• WTI Crude Oil (/CL) eased slightly to $79.61 per barrel.

Inflation heats up before CPI

The Labor Department now says headline CPI in December rose from the previously reported drop of 0.1% to an increase of 0.1%. November was revised from 0.1% to 0.2%, and October from 0.4% to 0.5%.

So, the trend remains down but at a higher level. Don’t be surprised if January’s number tomorrow reverses the downward trend, in part due to higher gas prices that month. That dynamic only affects the headline figure, not the core one that strips out energy and food. In December, core CPI rose from the previous 0.3% to a revised 0.4%.

Tomorrow’s data will likely show the CPI up 0.4% month-over-month in January, according to a Reuters survey of analysts. Core CPI is also seen up 0.4%. These figures might not be all that welcome in the markets, which could help explain last week’s rally in bond yields.

Higher peak rates seen

The CME FedWatch Tool recently showed a 90% probability of a 25-basis-point rate hike in March and a 77% chance of another 25-basis-point hike in May to above 5%, near the Fed’s projected “terminal,” or peak, level of between 5% and 5.25%.

The market now bakes in better than 40% odds of the Fed exceeding that terminal rate by summer, meaning expectations have grown for the Fed to hike its terminal projection in its next dot-plot for release after the March 21 – 22 Federal Open Market Committee meeting. The question is how high will it go? The market expects a peak between 5% and 5.5%, but it still predicts a high likelihood of the Fed stepping back and cutting rates from terminal levels by year-end.

Higher rate expectations have hit growth sectors of the market pretty hard lately, including semiconductor firms, homebuilders, and communication services companies. Utilities stocks also felt the heat from higher bond yields. However, there could be ideas that the sell-off has become overdone. Watch the growth sectors to see how they respond to tomorrow’s CPI data. A hotter-than-expected read on inflation might send those sectors scurrying for the exits again, but they might get a hall pass if the data are in line.

Earnings nuggets

We’re nearly 70% of the way through earnings season, and expectations for Q4 S&P 500® earnings still look weak. That said, they got a slight bump last week, possibly in the wake of strong results from major firms like Walt Disney (DIS) and PepsiCo (PEP). Analysts now expect a Q4 earnings per share (EPS) decline of 4.9%, research firm FactSet said Friday, a bit better than –5.3% the prior week.

The number of companies exceeding analysts’ estimates remains at 69%, well below the five-year average of 77%.

Data docket

Friday’s initial February University of Michigan Consumer Sentiment Index offered a bit of cheer, rising above year-ago levels. The headline reading of 66.4 was above Wall Street’s expectations for 65.0, up from 64.9 in January. The gauge for current conditions improved sharply too. On a less cheerful note, surveyed consumers expect 4.2% inflation over the next year, up from the previous 3.9%.

It’s tempting to feel more enthusiastic about consumer spending after this, but Trading Economics pointed out sentiment is 22% below its historical average since 1978. Retailers report earnings later this month, and big consumer-focused companies like Home Depot (HD) and Walmart (WMT) can potentially give investors color on consumer sentiment and how that’s playing out in actual spending.

January Housing Starts and Building Permits and January Producer Price Index (PPI) data are expected later in the week.

Reviewing the market minutes

Looking back, one takeaway from Friday is things could have been far worse. The major indexes took it on the chin early, testing key technical support levels but ultimately found buying interest and powered into the close. Most finished near their daily highs, possibly a sign that enthusiasm could continue as the new week begins.

You can’t give fixed income any credit, however. The 10-year Treasury yield closed 6 points higher at its highest levels since the start of the year. This could possibly be an ominous sign ahead of tomorrow’s CPI.

The Dow Jones Industrial Average® ($DJI) actually gained ground Friday, and it wasn’t simply energy stocks driving it higher due to rising crude prices. Health care and some retailers also performed well. Even downtrodden semiconductor company Intel (INTC) contributed to the $DJI’s gains.

Of course, the $DJI is just 30 blue chip stocks and shouldn’t be equated with the market as a whole. In general, semiconductors had a rough week, though that sector is coming off a very robust January. Consumer discretionary stocks finished at the bottom of the sector scoreboard Friday, hurt by Tesla (TSLA) and Amazon (AMZN). Over in communication services, Alphabet (GOOGL) and Meta Platforms (META) continued to struggle. The mega-caps in general just didn’t have much zip last week, making index gains hard to come by, especially for the Nasdaq Composite® ($COMP).

Here’s how the major indexes performed Friday:

• The $DJI rose 169 points, or 0.5%, to 33,869.
• The $COMP fell 0.6% to 11,718.
• The Russell 2000®(RUT) increased 0.18% to 1,918.
• The S&P 500 index (SPX) climbed nearly 9 points to 4,090.

Talking technicals: The SPX lost roughly 1% last week; its worst weekly performance this year. The $COMP struggled even more, losing 2.4%. While there’s no guarantee of Friday’s afternoon rebound spilling into Monday, sometimes a late bounce can provide a runway for buyers. Especially considering the SPX spent time below its 4,075 – 4,080 support level Friday and then recovered to close above that, a positive chart performance.

While the SPX is down a little more than 2% from its 2023 peak settlement of 4,179 on February 2, remember it experienced a 2.5% drop right in the middle of its January rally but quickly recovered. That might be a bit more challenging this time considering how the price-earnings (P/E) ratio has climbed since then.

$DJI academy: Want to learn more about the Dow Jones Industrial Average ($DJI) and its importance to the markets? Check out this Charles Schwab video.

Three Things to Watch

Small-cap rally fades: For two days earlier this month, the Russell 2000 (RUT) small-cap index lived up to its name. It actually closed above its namesake 2,000 level on February 2 and also traded above 2,000 intraday February 3. Then, the bottom fell out. By Friday, it wasn’t far above 1,900. That brief glimpse of 2,000 was the first time the RUT reached that level since last August. Unfortunately for any investors trying to emulate the RUT’s performance, its heavy weighting toward health care, financials, and industrial stocks—none of which kept pace with leading sectors over the last month—might’ve ultimately done in the RUT rally. On the other hand, small-cap investors may have some advantages if current trends toward softness in utilities and communication services stocks continue. The RUT’s exposure to those sectors is minimal. Watch the sector trends and see if RUT can dig itself out.

Will savings pay off? If you’re a shareholder of a company recently making big layoff announcements like Walt Disney (DIS), Baxter (BAX), Amazon (AMZN), or Microsoft (MSFT), one thing to keep in mind is what they’re actually spending to make these cost cuts happen. Sure, the idea is to reduce costs in the long run. In the short term, however, severance, outplacement, and staff readjustment costs can add up. It’s not an issue if you’re in a stock for years to come. Just don’t expect a margin improvement and growth miracle to come from what you’re seeing right now. It can take time. Also, as one analyst told Bloomberg last week, restructuring and job cuts don’t guarantee improved margins and often simply don’t work.

Inflation on wheels: Last week, the Manheim Used Vehicle Value Index got special attention for reporting a sudden one-month jump in used-car prices between December and January after experiencing steady decreases over the previous 12 months. According to that data, January prices were up 2.5% from December, the biggest month-over-month increase since the 3.9% price jump from October to November 2021. With tomorrow’s  CPI numbers in for January, remember the government also tracks used cars and trucks as a subindex; you can find it on the thinkorswim platform using CUSR0000SETA02: FRED.

Notable calendar items

Feb. 14: January Consumer Price Index (CPI) and expected earnings from Coca-Cola (KO) and Marriott (MAR)

Feb. 15: January Retail Sales, January Capacity Utilization and Industrial Production, and expected earnings from Biogen (BIIB), Cisco (CSCO), and Kraft Heinz (KHC)

Feb. 16: January Housing Starts and Building Permits, January Producer Price Index (PPI), and expected earnings from Entergy (ETR), Hasbro (HAS), and Hyatt Hotels (H)

Feb. 17: January Import and Export Prices, January Leading Indicators, and expected earnings from Deere (DE)

Feb. 20: President’s Day – market holiday

Feb. 21: January Existing Home Sales and expected earnings from Home Depot (HD) and Medtronic (MDT)

Feb. 22: MBA Weekly Mortgage Applications Index and expected earnings from TJX (TJX) and Baidu (BIDU)

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

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