Market Monitor: February Mid-Month Update
Headlines and Highlights
- Inflation hits 7.5% amid signs the pace may be cooling: U.S. inflation as gauged by the Consumer Price Index accelerated to another 40-year high in January as supply-chain delays persisted and prices jumped across a broad range of goods and services. Core inflation, which excludes the more volatile categories of food and energy prices, rose 6.0%. The latest data show the rate continuing to ebb slightly since last fall, however; the monthly increase of 0.6% in CPI for January was down from 0.7% in November and 0.9% in October.
- Omicron wave subsiding: The number of new cases of the Omicron variant has dropped dramatically in the United States over the past month, prompting talk of reduced restrictions and hopes for the economy to resume its pre-Omicron recovery pace. The seven-day moving average of reported COVID-19 cases fell from a peak above 800,000 in mid-January to 146,921 as of February 14th, according to data from the Centers for Disease Control and Prevention.
- Treasury yields return to pre-pandemic level: The U.S. 10-year Treasury yield climbed above 2% for the first time since August 2019 amid market expectations for the Federal Reserve to raise interest rates at an aggressive pace. Bond markets are pricing in investors’ expectations for seven rate hikes this year. The rise in yields has spelled the worst start to a year for bond prices in decades; Altair’s taxable bonds benchmark was down 4% year-to-date through mid-February.
Chart of Interest
The ‘old normal’: The 10-year yield now tops 2% for the first time in 2½ years but is expected to remain well below the 3% level topped in 2018.
Sources: Federal Reserve Bank of St. Louis, Altair Advisers
- Markets have been mixed in February amid ongoing concerns about inflation, rate hikes and a possible Russian invasion of Ukraine, with some asset classes posting modest rebounds from January’s sell-off. Through Tuesday, the S&P 500 Index was down 6.0% in 2022 after falling 0.9% this month while the small-caps Russell 2000 was 7.4% lower after adding 2.4% so far in February. Emerging-markets stocks are the only major asset class with a positive year-to-date return (0.9%). International developed stocks have regained 0.9% this month but remain negative for the year at -2.9%.
- Inflation expectations as measured by the St. Louis Federal Reserve Bank have edged lower for the past three months after rising for most of 2021, confirming that the bond market predicts inflation will begin moderating later this year. The 10-year breakeven inflation rate – a predictive measurement based on comparing the yield of an inflation-based bond to that of a nominal bond – has fallen below 2.5% from 2.8% in November.
- The jobs report this month demonstrated a strengthening labor market and the economy’s resilience even as the Omicron variant delivered a punitive blow at the end of 2021 and beginning of 2022. U.S. employers added 467,000 jobs in January and more than 1.1 million combined over the prior two months after earlier estimates were revised sharply upward. Wages have risen 5.7% over the past year in the effort to attract workers.
- Corporate earnings growth for the October-through-December period is running above 30% for a fourth consecutive quarter with three-quarters of S&P 500 firms having disclosed results, according to FactSet. Analysts expect earnings growth of 5.5% for the first quarter and 4.8% for the second quarter as the economy resumes a more normal growth pace and year-over-year comparisons become tougher.
- Consumer sentiment as gauged by the University of Michigan fell 8.2% in February as higher inflation and the stock market’s drop in early 2022 sapped confidence. The negative sentiment has not led to a reduction in spending, as demonstrated by the strong retail sales data released Wednesday, which has allowed companies to push through price increases and maintain corporate margins.
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