Weekly Newsletter January 13th to January 17th
RECAPPING LAST WEEK
Investors cheered softer-than-expected inflation data and strong earnings from large banks, which lifted U.S. equity indices and eased Treasury yields. The S&P500 and Nasdaq Composite indices gained 2.5-3%, while the Russell 2000 jumped nearly 4%. All eleven S&P500 sectors were positive, led by 6% spikes in financials, energy, and basic materials. Technology gains were somewhat muted after the Biden administration unveiled new rules aimed at curbing exports of advanced artificial intelligence chips to countries like China. Crude oil traded above $80 per barrel for the first time since July, but pulled back after Israel and Hamas reached a Gaza cease-fire and release of hostage agreement. U.S. Treasury yields tumbled after the core CPI reading fell for the first time in six months and wholesale increased less than forecasted in December. Markets reacted positively despite headline CPI ticking up to +2.9% YoY from +2.7%, as the Federal Reserve tends to focus on the core reading that strips out volatile food and energy prices. U.S. consumers are still fretting over higher inflation in the future, however, as the monthly New York Fed survey saw three-year expectations rise to 3% from 2.6%. In other economic news, U.S. retail sales were 0.4% higher last month, confirming strong domestic demand. The Atlanta Fed’s latest estimate for Q4 2024 GDP sat at +3%, boosted by higher forecasts for personal consumption. Manufacturing activity in the U.S. Mid-Atlantic region jumped by the largest percentage since April 2021, led by a surge in new orders and shipments. Small business and homebuilder sentiment both improved, while housing starts and permits climbed to the best pace in nearly a year. On the international side, China’s strong Q4 GDP helped the economy reach the government’s annual 5% growth target, though the imbalance between domestic production and demand widened. Industrial output increased 5.8% YoY, but despite policies aimed at domestic demand stimulation, retail sales only gained 3.5%. China’s trade surplus reached a record of nearly$1 trillion in 2024 as the country’s businesses and households held back on spending. In the UK, expectations rose for more interest rate cuts after weak economic data. Retail sales fell 0.3% MoM in December, while inflation slipped to 2.5% YoY and GDP is forecasted to be flat for Q4. Finance minister Reeves has been focused on improving growth and cutting debt, but her aims have been hampered by rising interest rates and volatility in global bond markets. Germany’s economy shrank for a second straight year in 2024, weighed down by the struggling manufacturing sector. Snap elections are scheduled for next month, with plenty of challenges awaiting the next government. Finally, Australia’s stronger-than-expected employment report did not completely douse hopes for a rate cut next month. Ultimately the decision may hinge on the next quarterly inflation report, as market watchers still favor the central bank’s first cut coming in May.
THE WEEK AHEAD
U.S. markets were closed yesterday for the Martin Luther King Jr. holiday, when a new administration entered the White House. Investors will be watching to see what policies may result and how quickly. This week is light on economic data, with global flash PMIs, U.S. corporate earnings, and the Bank of Japan’s interest rate decision the main releases of note. The U.S. docket includes existing home sales and revised consumer sentiment figures, while earnings season rolls on with reports due from Netflix, American Express, Texas Instruments, Procter& Gamble, and more. Recent global PMI data has shown U.S. growth outpacing the rest of the developed world, which has been evident in the trends of interest rate expectations from central banks. Any signs of reviving price pressures will be closely monitored. The World Economic Conference convenes this week in Davos, Switzerland. Topics on the agenda include geopolitical and trade tensions, economic fragmentation, and artificial intelligence. In Japan, officials have been hinting at an imminent interest rate hike, lifting odds fora quarter-point raise at Thursday’s BOJ meeting to as high as 85%. However, any market turmoil before the gathering could postpone the decision until March. Other events on the international calendar include Canada’s CPI, UK jobs data, and China’s update on prime loan rates.
CHART OF THE WEEK
Have rates peaked for now?
U.S. equity prices, supported by a strong economy and labor market, have been surprisingly resilient in the face of rising Treasury rates. Last week, it appears rates may have started their second meaningful pullback since the relentless advance from September’s low (blue A) began. The chart below applies Elliott Wave Theory to the CBOE 10-year Treasury Note Interest Rate index (TNX:CGI), which multiplies the 10-year yield by a factor of 10. During the a-b waves in red, the S&P500 index (SPX) continued to rally to what still stands as its all-time high. However, when the most recent leg-up in rates kicked off in December, equities struggled and pulled back 5% to technical support. Then last week, things started to change. The rate index reached 48, near the last two major highs and the top side of the upward channel, before pulling back after the benign CPI report. In one week, SPX erased most of December’s losses, as investors speculated that rate-cut expectations may be pulled forward. TNX:CGI is currently sitting at multi-year resistance and the MACD is displaying yet another bearish divergence. The Elliott Wave picture projects a potential C-wave down towards prior support levels near 35. A further retreat in rates could act as a tailwind for equity prices, but if the 10-year yield eclipses 5%, stocks may be in for a longer, more painful break.
Source: Charles Schwab Corporation
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