Market Snapshot: Stocks Up, Treasury Yields Lower, Commodities Mixed, Dollar Unchanged, Crypto Mixed
Past Week Events:
In December 2023, the Consumer Price Index (CPI), a key measure of inflation, rose more than expected. Prices went up by 0.3% compared to the previous month, which was higher than what most experts had predicted. Over the past year, prices have increased by 3.4%, a jump from the 3.1% increase seen before.
Via Bloomberg
A big part of this rise in prices came from higher costs for services, especially housing-related expenses, and a slowing in the drop of energy prices like gas. However, when you take out the often fluctuating costs of food and energy, the core inflation rate (which gives a clearer picture of the trend) also went up, but it’s the first time in a while (since May 2021) that this rate has dropped below 4%.
Via Bloomberg
An important point is that prices for goods like used cars stopped dropping and even started going up again. Also, when looking at services excluding housing, prices rose slightly, which is important because it's an area the Federal Reserve (the central bank of the U.S.) pays close attention to.
While the cost of housing is still going up, the rate of this increase is starting to slow down a bit compared to previous months. But, food prices are hitting record highs. This includes everyday items like meats, poultry, fish, eggs, and even restaurant meals.
Via Bloomberg
This situation puts the Federal Reserve in between a rock and a hard place. On one hand, some areas show inflation cooling down, but on the other hand, the cost of essentials like food is still going up a lot. The mixed signals that are being shown have created a complex situation for the Fed. They’ll have to weigh this with innumerable other factors to determine their strategies for controlling inflation and setting interest rates. Their decisions will have monumental impacts on how markets perform this year and beyond.
the Producer Price Index (PPI), which measures inflation from the perspective of producers, showed a surprising trend. Contrary to expectations that it would rise, the headline PPI, including key areas like energy and construction, actually decreased by 0.1% from the previous month. This marks the third consecutive month where the PPI hasn’t increased, a trend some might call 'deflation,' even though the year-over-year PPI inched up to a 1.0% increase.
The drop in the headline PPI for the month was mainly due to falling energy and construction costs. However, when you look at the core PPI, which excludes these volatile sectors like food and energy, there was no change from the previous month. This stability in core PPI brought its annual increase down to 1.8%, the lowest in two years.
The recent trend suggests a slight deflationary pressure in the broader PPI, but there are signs this might be changing, with prices starting to rise again. This situation poses a challenge for the Federal Reserve as it considers cutting interest rates in March to support the banking system, while also managing these inflationary trends.
Next Week:
Next week, the market is set to close on Monday for MLK day.
The consumer sentiment index via the University of Michigan is bound to come out next week. As seen by the graph below, the consumer’s perspective of the market has been on a positive trend and is up 16.6% in the year. Although numbers are rising, we are still trailing pre-covid levels. This index rose 13.7% during the month of December, and analysts predict this index to neither increase nor decrease. The reason for this may be because of the hotter-than-expected inflation data that came out this past week.
Quip of the Week:
"The market is full of noise. You need to get the signal out of the noise."
Jim Simons, founder of the Medallion Fund which has beaten Warren Buffet year after year
U.S Stocks:
Indexes(This Week)
S&P 500 Index: 4,783.83(1.84%) Dow Jones Industrial Average: 37,592.98(0.34%)
NASDAQ 100 Index: 14,972.76(3.09%) RUT 2000 Index: 1,950.96(-0.01%)
Stock Sectors:
The market had an overall positive week. Inflation data came slightly hotter than expected, but investors feel optimistic as future rate cuts are still highly likely. Furthermore, Bitcoin ETFs were fully approved, providing another boost to the market.
The technology sector ended at the top of the ladder being up 4.41%. Top performing stocks were DOCU and SHOP, ending up 16.31% and 9.25% respectively.
Energy was, oddly enough the biggest loser this week, ending -2.36%. Despite the U.S. attack on Yemen, oil pulled back after hastily rising. Oil continues to prove its reign as one of the most volatile sectors in the market, particularly during this period of high geopolitical tensions.
Treasuries:
Via Bloomberg
The yield curve is a graph that shows the difference between short-term and long-term interest rates for government bonds. Normally, long-term rates are higher than short-term rates. Recently, short-term rates dropped below long-term rates. This is called "dis-inverting" of the yield curve. This is evident in the above graph which shows short-term yields dropping quite significantly on the week.
This change happened because traders believe that the Federal Reserve (the Fed), might lower interest rates more than they previously thought in 2024. Traders are now quite confident, over 80% sure, that the Fed will reduce rates in March. They even think there could be up to 7 rate cuts in 2024. This is in large part due to the somewhat optimistic inflation data.
Commodities:
Oil This Week:
Surprisingly, despite ongoing tensions in the Middle East, including missile and drone attacks on cargo ships in the Red Sea, oil prices have remained relatively stable in recent weeks. These attacks, led by Houthi rebels in response to Israel's actions in Gaza, have targeted ships they perceive as linked to Israel. Despite the attacks, no ships have been sunk, but the situation has escalated, prompting the United States to send a naval task force to the region. This response included a U.S. Navy operation on December 31 that eliminated 10 Houthi fighters and destroyed three of their speedboats.
As we reported yesterday, following the largest barrage of projectiles by Houthi rebels, the U.S. and UK engaged with them and led air strikes against Houthi facilities in Yemen.
Despite these developments and a brief surge in Brent crude oil prices above $80 per barrel after the air strikes, the overall oil market has seen prices moving sideways. Traders seem to be treating the Middle East tensions as a secondary concern, focusing instead on broader market fundamentals, unless there is a direct and clear threat to global oil supply.
Gold This Week:
Gold prices reached a one-week high due to escalating Middle East tensions and speculation of a potential Federal Reserve rate cut. The conflict in the Middle East, specifically U.S. and British strikes against Houthi forces in Yemen, fueled safe-haven buying in gold. Additionally, softer U.S. producer price inflation in December indicated a possible easing of the Federal Reserve's tight monetary policy, further boosting gold's appeal. Reports highlight that lower U.S. producer prices, covering goods like diesel fuel and food, suggest a continued reduction in inflation. Despite this, U.S. consumer prices in December rose more than expected. Market traders now estimate an 80% chance of a Fed rate cut in March. Gold, typically seen as a safe haven, benefits from such uncertainties and lower interest rates.
Crypto:
BTC This Week:
Via TradingView
BTC: $42,995 (-8.59%) ETH: $2,531 (8.51%)
Bitcoin's price fell below $42,000 following the approval of trading of Bitcoin exchange-traded funds (ETFs) in the United States. This drop was almost 10% was a a reaction to the recent approval of Bitcoin ETFs, a phenomenon often referred to as "sell the news." Earlier, Bitcoin had reached a high of $46,000 and even surged to $49,000 when the ETFs began trading. However, this rise was short-lived.
The decline in Bitcoin's price also affected related stocks. Shares of Coinbase, a cryptocurrency exchange that provides custody services to most of the ETF issuers, fell by 7.4%. Similarly, Bitcoin mining companies like Marathon Digital, Hut 8, and Riot Platforms experienced significant declines, with Marathon Digital experiencing the largest drop of 15%.
Europe:
DAX Index This Week:
Via TradingView
Stoxx 600: 476.76(-0.21%) DAX: 16,704 (0.52%) FTSE 100: 7,624 (-0.84%)
The European Central Bank (ECB) chief economist Philip Lane, during an event in Dublin, indicated that interest rate cuts are not a “near-term topic” for discussion. This statement came in response to recent inflation data, which largely aligned with the ECB's current assessment and projections. In December, Euro zone inflation increased to 2.9% from 2.4% in November, supporting the ECB's decision to maintain interest rates at record highs. The ECB anticipates inflation to fluctuate between 2.5% to 3% for much of the year. Investors have been anticipating rate cuts, with expectations set for 150 basis points worth of cuts in the next year, beginning as early as April. However, several ECB policymakers have deemed this timeline unrealistic due to persistent inflation.
Asia:
XJO Chart (5-day)
Via TradingView
XJO(Australia): 7,498 (0.12%) Shanghai 180 Index: 7,148 (-1.30%)
Nikkei 225(Japan): 35,577 (6.53%)
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