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January 16, 2024

Attached above is our weekly newsletter, The Metrics that Matter, which reviews key drivers of recent market performance and monitors important economic updates for the week ahead.

Stocks regained their footing last week and closed higher, with large-cap growth and technology companies outperforming the broader market. The week marked the unofficial start to fourth quarter earnings season, with the four biggest banks in the U.S. – JPMorgan, Wells Fargo, Bank of America, and Citigroup – all reporting results on Friday. The results were rather noisy with several company-specific and one-time factors impacting results, such as all four banks recording charges from the FDIC to boost its account after last year’s regional banking crisis. However, investors appeared to be more focused on last Thursday’s inflation data, as both stock and bond markets look for clarity on the direction of interest rates in the year ahead.
 
On Thursday, the Labor Department released the December Consumer Price Index (CPI) report, which showed the path to the Fed’s 2% inflation target remains on track but that there may be some bumps along the way. The consumer price index increased 3.4% from a year earlier in December, up slightly from 3.1% in November. However, core prices, which the Fed watches more closely as it removes the volatile price swings in food and energy, eased to a 3.9% year-over-year level. This was the first time that core inflation fell below 4% since May 2021.
 
And when looking at core inflation data through a near-term lens, inflation is running below that 3.9% level. Looking at just the last six months of data, core inflation is running at an annualized rate of 3.2%. So, pricing pressures have eased considerably in recent months, though they remain above the Fed’s 2% goal.

Looking under the hood of the inflation report, we learned that shelter costs continue to be the main culprit behind elevated pricing levels, accounting for over half of December’s monthly increase. Interestingly, if you remove shelter costs from the overall inflation picture, inflation is running at just 1.8% year-over-year, which is below the Fed’s stated target. However, shelter costs account for 35% of the consumer price index, so it must be included in any analyses of inflation. In spite of their significant contributions to overall inflation measurements, it’s important to understand that shelter costs have been easing in recent months (from 8.2% in March 2023 to 6.2% in December’s report) and many economists expect this trend to continue in the months ahead.
 
The updated inflation figures did little to change investors’ expectations that the Fed will be aggressively cutting interest rates this year. The 2-year Treasury yield, which is heavily influenced by investors’ monetary policy expectations, fell 26-bps last week from 4.40% to 4.14%. And looking to the Fed Fund Futures market, investors continue to price in 150 bps worth of rate cuts this year, double what the Fed penciled in back in their December projections. So, the central bank and investors continue to be at odds with how much rates should fall this year.
 

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The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.