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Rates and earnings in focus this week

DAVID JOY – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL
WEEKLY MARKETS COMMENTARY — Jan. 18, 2022

It turns out that December wasn’t a very good month for the U.S. economy. The combination of the Omicron variant and higher inflation conspired to keep activity subdued. Retail sales suffered a far larger decline than anticipated, dropping 1.9 percent. And industrial production also fell unexpectedly. These reports followed earlier signs of slowing contained in the ISM PMIs and payroll employment, although the unemployment rate continued to fall. The Atlanta Fed’s GDPNow model lowered its fourth quarter growth model last week all the way to 5.0 percent from 6.7 percent in response to the weakness. Consumer prices also surged higher by 7.0 percent in December, the highest level since 1982. 

Energy prices continue to surge; interest rates move higher 

Headline inflation has recently gotten little reprieve from energy prices. After rising 14 percent in December to $75.21 a barrel, the price of oil has continued to march higher. It rose for the fourth straight week last week, surging another $4.92. And that strength has carried over to this week, with WTI now trading close to $85 a barrel, its highest in eight years. One year ago, oil was trading at $53 a barrel. Oil is deriving its strength, in part, from expectations that the Omicron variant will not be as economically disruptive as feared. In the U.S. the seven-day moving average of daily new infections continues to climb. But, in the northeast, there is evidence that the daily rate of infection is beginning to recede, encouragingly following the pattern first seen in South Africa and in the UK. Tight supplies and middle east tensions are also weighing on the price of crude.

Despite the relative softness of December, interest rates continued to move higher last week. The ten-year note rose two basis points to 1.78 percent, its highest since January, 2020 after beginning the year at 1.51 percent. The two-year note yield rose 10  basis points to 0.97 percent. It began the year at 0.73 percent. Both of these rates have continued higher this week, with the ten-year now at 1.82 and the two-year at 1.02 percent. Expectations for rate hikes by the Federal Reserve this year also continue to firm. The CME FedWatch Tool now indicates a 63 percent chance of four or more rate hikes this year, with the greatest likelihood of four. That is up from 52 percent just last week. Credit spreads have shown only a muted response. High yield credit spreads narrowed on the week, after reaching a three-week high on Monday. BBB spreads widened fractionally. 

Earnings season is off to a lackluster start; overseas markets mixed 

Stock prices slipped for the second straight week to start the year. The S&P 500® index fell 0.3 percent on the week, leaving it lower on the year by 2.2 percent. The Nasdaq is lower on the year by 4.8 percent after last week’s loss of 0.3 percent. Fourth quarter earnings season got off to a lackluster start, with mixed reception to bank earnings. JPMorgan Chase fell more than 6 percent on Friday after its earnings disappointed. Citigroup also fell, although a far more modest 1.3 percent. Wells Fargo bucked the trend and rose by 3.7 percent following its earnings release. Goldman Sachs, Bank of America, and Morgan Stanley, continue the big bank results. Other notables on this week’s earnings calendar include Intel, American Airlines, Baker Hughes, and Netflix.  

Overseas markets were mixed last week, but traded mostly higher. The EuroStoxx 50 index slipped 0.8 percent in local currency terms, but rose on Monday while U.S. markets were closed, leaving it higher on the year by 0.1 percent. In the UK the FTSE 100 rose 0.8 percent last week and again on Monday, bringing its year-to-date gain to 3.1 percent. Stocks in Asia also rose last week. The MSCI Asia Pacific index climbed 1.6 percent, leaving it higher on the year by 0.8 percent, although the index stumbled slightly at the start of trading this week. On Monday China reported year-over-year growth in GDP in the fourth quarter of just 4.0 percent, down sharply from 6.4 percent in the prior year, prompting the central bank to lower interest rates. And stocks in Latin America led the way higher globally, rising 5.0 percent, leaving them higher on the year by 3.9 percent. Latam stocks added modestly to these gains on Monday. 
 

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Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. 

A 2-year Treasury note is a debt obligation issued by the United States government that matures in 2 years. 

The ISM manufacturing index, also known as the Purchasing Managers' Index (PMI), is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy

The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

The CME Group’s Fedwatch Tool calculates the unconditional probability that the Fed would hike, cut, or keep the federal funds rate steady during a given FOMC meeting. These calculations are based on the CME Group’s 30-Day Federal Funds Futures.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

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