Markets Refuse to Fade Away

As the Rolling Stones once put it, “a storm is threatening… if I don’t get some shelter… I’m gonna fade away.”

That pretty much sums up the pivotal event from last week. But markets, to their credit, refused to fade away. US CPI came in higher-than-expected thanks in large part to continuing upward pressure in the housing market. Ironically, it was not due to home buyers but home renters, who drove up shelter costs within the CPI report more than economists had anticipated (See chart of the week below).

Owners’ equivalent rent measures how much money a property owner would have to pay in rent to be equivalent to the cost of ownership. With the increase in mortgage rates, the equivalency has gone up significantly. Additionally, the supply/demand imbalance created by low housing affordability has led to a greater number of people looking to rent.

The higher-than-expected CPI print created a significant repricing in the probability of a rate cut. March is essentially being taken off the table, and the probability of a cut in May has gone from a 60% chance, before the CPI report, to just 38% to close out the week.

Small caps were hit especially hard, given their leverage profile in comparison to large caps. But, as significant as the report and sell-off were, what may have been equally impressive, and interesting, was the recovery that equity markets made in the following days. In particular, the outperformance of small caps overall for the week continues to support a backdrop of equity markets shifting focus from policy dependency toward fundamental drivers of equity prices.

A light economic calendar this week will leave the spotlight on Nvidia, with their earnings report on Wednesday. The report should serve as the latest update on the state of artificial intelligence investment and momentum. But maybe more importantly, the report will be a test for just how far and high expectations have gotten for the meteoric growth Nvidia, and other members of the “magnificent 7”, have gotten.

US Inflation – US Headline CPI Year-Over-Year for January came in at 3.1% vs estimates of 2.9%. Core CPI Year-Over-Year came in at 3.9% vs estimates of 3.7%.
US Consumer Spending – US Retail sales for January came in at -0.8% Month-Over-Month vs estimates of -0.7%.
Non-US Recession – Both Japan and the UK entered technical recession by each reporting their second consecutive quarters of negative GDP growth for Q4 of 2023.