Weekly | Crossed Inflationary Messages

Your weekly summary with the most important news for your investments, in this edition:

Factors Influencing Market Behavior.
Future Expectations and Challenges

After an exceptional 2023 stock market year, it was to be expected that institutional investors would start the New Year by reconfiguring their investment portfolios. Thus, profit-taking in the technology sector was to be expected after some of its stocks had performed extraordinarily well. However, after mid-week, following the publication of the Federal Reserve (FED) minutes, we saw how the fall of the main stock indexes was accentuated with shares such as Apple dropping by -6.5%, accompanied by a rebound in the 10-year sovereign rate, which closed at 4.05%, adding +17 basis points (the higher the interest rate, the lower the price of bonds).

The three factors that impacted this behavior were the following:

The FED minutes were more cautious with the evolution of inflation along with the evolution of interest rates.
December's employment data came in above market expectations, showing an increase in wage inflation to 4.1% (from 4%).
Headline inflation in the Euro Zone in December reversed trend to 2.9% (from 2.4%) even though core inflation, which excludes food and energy prices, continued its downward trend to close at 3.4% (from 3.6%).

What is important to highlight in the Euro Zone is that producer inflation has been declining in the order of -8.8%, reflecting the strong macroeconomic deceleration that the region has been registering.

This second week of the new year will not only be marked on Thursday by the release of last month's official inflation data, where headline inflation is expected to marginally increase to 3.2% (from 3.1%) and core inflation to 3.9% (from 4%), but also by the formal release of quarterly results of S&P 500 companies starting on Friday with Bank of America, BlackRock, Citi, Delta Airlines, JP Morgan Chase and Wells Fargo among others. For now, according to Factset, S&P 500 companies' revenues will expand +3.1% while earnings will expand +1.3%, both figures relative to Q4 2022. The focus will undoubtedly be on comments from large U.S. banks regarding U.S. financial conditions and credit demand in an environment where the monetary policy rate is hovering at 5.5% with no signs of easing in the labor market. It is to be expected that U.S. bank loan portfolios will have deteriorated and the resulting provisions will have increased in the fourth quarter of the year. In the meantime, we will once again be hearing about the US fiscal budget as Congress only has until January 19 to agree to the $1.6 trillion USD agreed for the current year last night, otherwise once again the tax cut will begin, pending a temporary extension in a presidential election year.

Let's start by briefly analyzing last month's employment data where the economy generated 216k new jobs (well above the 170k expected), the unemployment rate remained at 3.7% and wage inflation climbed to 4.1% (whereas the market was expecting a decline to 3.9% from 4%). As we have pointed out on several occasions, without wage inflation easing it is unlikely that we will see a significant drop in core inflation.

Which brings us to the following comments from the FED through its minutes starting with:

"In their discussion of inflation, all participants noted that clear progress had been made in 2023 toward the Committee's 2 percent inflation target. They expressed concern that elevated inflation will continue to hurt households, especially those with limited resources to absorb higher prices. Participants noted that inflation remained above the Committee's target and that they needed to see more evidence that inflationary pressures were easing to be confident of a sustained return of inflation to 2 percent."

Adding the following comment that was enough to generate a change in the sovereign rate structure:

"In their submitted projections, nearly all participants indicated that, reflecting improvements in their inflation outlook, their baseline projections imply that a lower target range for the federal funds rate would be appropriate by the end of 2024. However, participants also noted that their outlook was associated with an unusually high degree of uncertainty and that it was possible that the economy might evolve in a way that would warrant additional increases in the target range. Some also noted that circumstances might warrant keeping the target range at its current value for longer than they anticipated at the time. Participants generally emphasized the importance of maintaining a careful, data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain in a tight stance for some time until inflation was clearly declining in a sustainable manner toward the Committee's objective."

In doing so postulating that it would still be premature to talk about interest rate cuts in the first quarter of the year.

On the corporate front, Tesla achieved sales of 485 thousand units in the fourth quarter totaling 2023 sales of 1.8 million units. This in an environment where yesterday The Wall Street Journal published an article about Tesla CEO Elon Musk's drug use on its Sunday cover. While Boeing was in the news spotlight after one of Alaska Airlines' aircraft lost a piece of fuselage mid-flight. Additionally, we saw an extraordinary rebound in Peloton, whose price rallied almost +18% during the week after reaching an agreement with TikTok to create a sports hub in the social network. Finally, according to various media reports, the US government is filing a lawsuit against the giant Apple to determine its monopolistic power.

In conclusion, the focus in the following weeks will be on the quarterly results of the S&P 500 companies to determine whether their earnings support market values. This in an environment where the FED continues to send mixed messages about monetary policy.

This Week

Monday (January 08)

Quarterly Reports

Jefferies Financial Group Inc.
Commercial Metals Company
Helen of Troy Limited
Accolade, Inc.
Pure Cycle Corporation

Economic Reports

Consumer Inflation Expectations Report

Tuesday (January 09)

Quarterly Reports

Albertsons Companies, Inc.
TD SYNNEX Corporation
Acuity Brands, Inc.
MSC Industrial Direct Company, Inc.
WD-40 Company

Economic Reports

Balance of Trade Report
Imports Report
Export Report

Wednesday (January 10)

Quarterly Reports
KB Home
Richardson Electronics, Ltd.

Thursday (January 11)

Quarterly Reports

Taiwan Semiconductor Manufacturing Company Ltd.
Infosys Limited
WaFd, Inc.
Concrete Pumping Holdings, Inc.
Loop Industries, Inc.

Economic Reports

Inflation Rate Monthly Change Report
Inflation Rate Annual Change Report
Monthly Inflation Report
Annual Inflation Report

Friday (January 12)

Quarterly Reports

UnitedHealth Group Incorporated
JP Morgan Chase & Co
Bank of America Corporation
Wells Fargo & Company
BlackRock, Inc.
Citigroup Inc.
The Bank Of New York Mellon Corporation

Economic Reports

Producer Price Index Report

Now you have more information about your investments. See you next week with more news.

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