Week in Review: January 12, 2024

January 16, 2024

Recap & Commentary

Markets ended the week higher as investors digested a spate of inflation data, comments by Fed Speakers and the start of fourth quarter earnings season.

Investors largely shrugged off news that consumer prices rose faster than anticipated in December. At certain times during 2023, such readings would have caused concern amongst investors about how the Fed might be forced to respond with either additional rate hikes or keeping rates “higher for longer.” Currently; however, investors appear committed to the idea that the Fed will cut rates up to six times this year. Reflecting the somewhat blasé attitude towards the data, expectations for a rate cut in March increased from 62% to 70% over the course of the week.

For their part, multiple Fed Speakers tried to dampen market expectations for 2024 rate cuts. In summary, the various Fed members said that while rate hikes might be finished, given current levels of inflation, it would be premature to consider cutting rates in March and that the Fed will likely need to maintain a restrictive stance on monetary policy for some time to fully ensure that inflation is returning to the Fed’s longer-term target of 2%.

Disconnects between Fed and investor expectations are not unusual. However, how the disconnect is resolved — whether the Fed comes to accept the market’s expectations, or vice versa — will determine in part how financial markets behave and perform over the course of the year.  Market acceptance of the Fed’s more cautious outlook (currently three rate cuts) would likely serve as a headwind to performance, while Fed acceptance of the market’s outlook (currently six rate cuts) would likely serve as a tailwind.

Economic Commentary

Consumer inflation (CPI) increased 0.3% in December, slightly higher than expected, and up from November’s 0.1% increase. Compared to a year ago, prices rose 3.4%, up from November’s 3.2% pace. Core CPI, which excludes food and energy, also increased by 0.3% in December, mostly due to a 0.5% rise in the shelter index. Compared to a year ago, core inflation rose 3.9%, down from November’s 4.0% pace, but 0.1% faster than expected. Despite the readings, the market continues to believe the Fed will begin cutting rates in March.

Producer inflation  (PPI) declined 0.1% in December, below expectations for a 0.1% increase.  Core PPI was unchanged during the month.  In December, goods prices declined 0.4% while services prices were unchanged. In the past year, goods prices have declined 0.8% while services prices have increased 1.8%.

November’s trade deficit of $63.2B was lower than the expected $64.9B. In the last year, imports and exports have increased 0.1% and 0.4%, respectively. US trade patterns shifted notably in 2023. Through November, Chinese imports fell 21% compared to 2022. In turn, Mexico is now the top exporter to the US.

Consumer credit rose $23.7B in November. The increase was far higher than the consensus forecast of $9B.  The monthly increase brought total consumer credit outstanding above $5T for the first time ever.

Of Note

The US Securities and Exchange Commission (SEC) approved the first US-listed ETFs that track the “spot” price of Bitcoin by investing directly in the crypto-currency.  Previously, ETFs were limited to investing in Bitcoin futures.

Market Indices   (As of 01/12/2024)

• Retail Sales
• Industrial Production
• Housing Starts
• Existing Home Sales
• Consumer Sentiment
• Weekly Jobless Claims