Mid-Week Market Minute 2.15.23

Stocks, Bonds Trend Higher; Retail Sales Estimate Beats Expectations

Stocks and bonds trended higher this week against the backdrop of hotter-than-expected inflation data alongside strong retail sales data. The Consumer Price Index for January showed month-over-month inflation rose by 0.5% in January, against expectations for a more modest increase. For the year, inflation rose at a clip of 6.4%, lower than last month’s year-over-year reading of 6.5%. Shelter costs accounted for about half of the monthly increase, while energy was a significant contributor as well. In addition to inflation data, Wednesday morning brought the advance estimate of retail sales for January. The report was very strong, showing a 3% jump against expectations for an increase of 1.9%. On a year-over-year basis, retail sales increased 6.4%, precisely in line with Tuesday’s inflation print.

Recently, Federal Reserve Chair Jerome Powell has talked about the disinflationary forces at play in the economy. This week’s economic data helped reinforce the Fed’s narrative that although inflation is moving in the right direction, there is still work to be done. Looking forward, the markets now are expecting the central bank to hike rates by 0.25% (25 basis points) in March, followed by one, or possibly two more additional hikes before eventually taking a breather early this summer. Short-term bond yields have responded in anticipation of more tightening, and the yield on the 2-year Treasury is now trading at 4.65%, up from 4.20% just two weeks ago.

Source: GSAM, CNBC, JPMorgan

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