ECONOMIC REVIEW

  • The headline Consumer Price Index (CPI) figure rose 0.3% in January, its highest reading in four months and above the consensus expected 0.2%.
    • While the yearly rate fell to 3.1% from December’s reading of 3.4%, annual inflation last month still exceeded the forecast rate of 2.9%.
    • Despite a 2% increase in the price of natural gas, the broader energy category declined 0.9%, due to falling gasoline prices, which backed up -3.3% and tempered the headline number.
  • Core CPI, which excludes the volatile food and energy categories, increased by 0.4%, beating the consensus expectation of 0.3% and reaccelerating beyond December’s reading, also 0.3%.
    • Core prices are up 3.9% versus a year ago – unchanged from last month – and supported by elevated transportation services (running at 9.5% year-over-year) and lagging shelter inflation (6.0% YoY).
  • The Producer Price Index (PPI) also indicated an unexpected increase in price pressures last month, rising 0.3%.
    • Energy (-1.7%) and food prices (-0.3%) declined from the producer’s perspective, meaning the increase in “core” PPI was driven by rising prices in the services sector (2.2%).
    • Core PPI jumped 0.5% in January – the largest monthly increase since July, but the annual rate has trended down since peaking at 9.7% in March of 2022.
  • In other consumer-related news, retail sales declined in January (-0.8%) and revisions to prior months were negative.
    • Retail sales have fallen in three of the last four months and this figure is up a meager 0.6% in the last year.

How do CPI, PPI, and Retail Sales impact you?

  • Hotter inflation readings are hardly encouraging for investors hoping for falling interest rates this year.
    • A stubborn CPI and a resurgent PPI figure (in conjunction with a robust labor market and solid economic growth) give the Federal Reserve (Fed) little reason to consider easing monetary policy.
  • Declining retail sales may suggest that consumers – the primary engine driving the American economy – are finally running out of pandemic-era excess savings.
    • Despite these less-than-ideal readings, many economists are looking past the January figures, instead pointing to other, less-alarming data and measurement challenges unique to the first month of the year.2

LOOK FORWARD

  • In a short week due to the President’s Day holiday, U.S. Leading Economic Indicators (LEI), existing home sales, and the minutes from the Fed’s January Federal Open Market Committee (FOMC) meeting highlight a light week of economic data.

How do LEI, Fed Minutes, and Existing Homes impact you?

  • LEI, while less predictive in recent years, provides a helpful “big picture” perspective of the economy.
  • Existing home sales are expected to increase for January, adding to speculation that the measure may have found a bottom from which to climb as the housing market adjusts to a higher interest rate environment.
  • Fed minutes should shed some light on what central bank officials make of the stronger and hotter economic and inflation backdrop to start 2024.

MARKET UPDATE

Market Index Returns as of 02/16/2024WTDQTDYTD1 YR3 YR5 YR
S&P 500-0.35%5.15%5.15%24.69%10.10%14.44%
NASDAQ-1.31%5.18%5.18%34.92%4.96%17.12%
Dow Jones Industrial Average0.02%2.76%2.76%16.65%9.11%10.68%
Russell Mid-Cap0.67%1.93%1.93%9.94%4.02%9.98%
Russell 2000 (Small Cap)1.17%0.40%0.40%6.09%-2.11%6.75%
MSCI EAFE (International)1.47%1.04%1.04%11.16%3.00%6.90%
MSCI Emerging Markets2.11%-0.65%-0.65%4.33%-8.81%2.20%
Bloomberg US Agg Bond-0.55%-2.01%-2.01%2.31%-3.49%0.47%
Bloomberg High Yield Corp-0.32%-0.15%-0.15%10.86%1.48%4.23%
Bloomberg Global Agg-0.34%-3.11%-3.11%1.59%-5.88%-1.08%

OBSERVATIONS

  • The S&P 500 and the NASDAQ both pulled back last week in response to two hotter-than-expected inflation readings and declining retail sales.
    • The Dow barely edged out a positive return after falling in unison with the other major indexes early last week.
  • Domestically, Mid and Small-cap stocks both outperformed indices tracking companies of larger market capitalization.
  • Internationally, developed markets were solidly positive (1.47%) and emerging markets jumped more than 2%.
  • Bonds were negative domestically, globally, and across the credit spectrum.

BY THE NUMBERS

  • The Secret Oil Trading Ring That Funds Russia’s War: In the early days of the Ukraine war, data trickled out showing that a mysterious firm called Nord Axis had become one of the biggest global traders of Russian oil. The company seemed to have sprung from nowhere. It had been incorporated in Hong Kong nine days before Russia’s invasion. A man from Belize who was a nominee director said later that year that he didn’t know why Nord Axis had been founded or who its owners were. With Western buyers of Russian oil beating a retreat, Nord Axis and several other obscure firms were keeping the nation’s most important industry afloat by finding new places to sell the oil, generating billions of dollars in revenue for President Vladimir Putin’s war effort. The U.S. and other Western countries wanted to choke off Russia’s oil money. But who was masterminding the deals? The answer: a little-known trader from Azerbaijan named Etibar Eyyub, who swiftly assembled a clandestine trading and shipping empire that now moves vast quantities of oil to buyers in China, India, and other new markets, according to people who have worked with or done deals with him. These people claim Eyyub has cobbled together a fleet of aging tankers and disguised the trading by using a maze of companies registered in Dubai and Hong Kong.4
  • U.S. Drafts U.N. Resolution Calling for Temporary Cease-Fire in Gaza: The U.S. has circulated a draft resolution at the United Nations Security Council calling for a temporary cease-fire in Gaza “as soon as practicable” and in tandem with the release of all hostages taken on Oct. 7, as the Biden administration increasingly clashes with the Israeli government over the conduct of the war. Washington has long rejected any resolution on Gaza that includes the word cease-fire, arguing that doing so would allow Hamas to survive to fight another day, and has advocated instead for “pauses” to facilitate the release of hostages and allow humanitarian aid into Gaza. The U.S. ambassador to the U.N., Linda Thomas-Greenfield, said this week that the U.S. would veto an Algerian proposal scheduled for a vote on Tuesday that calls for an immediate cease-fire and doesn’t explicitly condemn Hamas and the Oct. 7 attack the group led, according to a diplomat familiar with the text.5

Reprinted with permission from BTN. Copyright © 2021 Michael A. Higley.