Weekly Newsletter February 10th to February 15th
RECAPPING LAST WEEK
Despite hotter-than-expected inflation reports and the threat of additional tariffs, U.S. equity indices finished the week near record highs as interest rates trended lower. The Nasdaq Composite index rose more than 2.5%, while the S&P500 gained 1.5% and the Russell 2000 was flat. Nine of eleven S&P500 sectors posted gains, with technology leading at +3%. Crude oil prices were slightly lower in a volatile week as traders weighed the implications of tariffs, Russia-Ukraine peace talks, and U.S. plans to squeeze Iran’s oil exports. Gold futures edged closer to $3,000 per ounce before settling slightly higher at $2,897. U.S. Treasury yields initially jumped after Wednesday’s CPI report, which revealed higher increases than expected in January—a common story in recent years. Headline inflation rose 0.5% MoM and 3% YoY, while core CPI accelerated by 0.4% MoM and 3.3% YoY. In Congressional testimony, Fed Chair Powell said that the inflation report reinforced the idea that progress has been made, but that rates will remain restrictive until the 2% target is reached. Fed funds futures were only pricing in one interest rate cut for this year at week’s end. Yields retreated after Friday’s retail sales figures, which showed a monthly decline of 0.9%. Seasonal weakness has been typical in January, with winter weather and post-holiday consumer spending declines to blame. Other factors aided the softening in yields. Despite the higher CPI and PPI readings, some economists argued that January’s core PCE index—the Fed’s preferred measure that is to be released later this month—is likely to tick lower. That is because many PPI components like medical services, airfare, and auto insurance were much lower, providing a welcomed readthrough to core PCE. Meanwhile, after announcing 25% tariffs on steel and aluminum imports, the White House said it plans to introduce reciprocal tariffs on all U.S. trading partners but delayed their implementation. Although tariff news has sparked recent market volatility, this week’s reaction suggested that investors’ perceptions may be starting to shift as negotiating windows open. In other economic news, U.S. small business optimism declined last month, as owners commented on persistent hiring challenges, while the uncertainty index surged. Industrial production rose overall last month due to higher utilities usage from cold weather, but a sharp decline in automobile output restrained manufacturing. Overseas, the British economy grew by just 0.1% in Q4 after being flat the prior quarter. The results beat expectations, but growth is forecasted to remain sluggish for quite sometime as businesses deal with higher costs. In China, consumer inflation rose for the first time since August, boosted by spending from the Lunar New Year holiday. However, factory price deflation extended into a 29th straight month, falling 2.3%.
THE WEEK AHEAD
U.S. markets were closed Monday for the Presidents’ Day holiday. This week’s economic calendar features FOMC meeting minutes, U.S. housing data, and the latest global flash PMI readings. In its most recent statement, the Fed was optimistic on the economy and labor market and said it is in no rush to cut rates further. There doesn’t seem to be much dissent on the committee towards this approach, especially while inflation risks still seem skewed to the upside. Nevertheless, Wednesday’s meeting minutes will be scrutinized for further clues on the direction of monetary policy. After a brutal year for the U.S. housing market, the first update for 2025 arrives with starts, permits, and existing home sales for January. Keep an eye on Friday’s revised consumer sentiment report as the inflation expectations portion caused quite a stir in the preliminary release two weeks ago. Retail bellwether Walmart will report earnings on Thursday before the market opens, while the rest of the U.S. calendar includes the Empire State and Philly Fed manufacturing indices. On the international side, the Reserve Bank of Australia is expected to deliver its first interest rate cut of this cycle on Monday evening as inflation has shown signs of easing. The UK has CPI, retail sales, and employment data on its agenda. Finally, Japan’s preliminary Q4 GDP and National Core CPI readings could move the needle on expectations for the Bank of Japan’s next rate hike.
CHART OF THE WEEK
Ripple effects of U.S. dollar reversal
The U.S. Dollar index ($DXY) has been showing signs of a pending reversal since the new year began. Confirmation arrived last week with the index finally breaking below $107 for the first time in two months. There have been two main catalysts—the first being the hope that the effects of tariffs would be less than feared, given the delays in implementation. The second catalyst—and perhaps more important—was the shift in sentiment on a potential Russia-Ukraine ceasefire. Any positive developments in the ongoing war should be welcome news for Europe. The MSCI EAFE index (MXEA), which is 65% European stocks, rallied 2.5% last week and is approaching its all-time high from September. The dollar index is in relation to other currencies, not purchasing power, with 58% of that exposure to the euro. A declining $DXY, therefore, impacts the euro currency and its related assets most positively. The case for a continued downtrend in the dollar index still likely hinges on the catalysts described earlier, but from a technical analysis perspective the pieces are falling into place. The high in January was accompanied by a significant bearish MACD divergence, and within a week the index had broken below its upward trendline and the 20-day exponential moving average (EMA). The next bounce higher was strong but short lived as it rallied to the underside of the former support area while making a lower high. The final technical confirmation came on Friday, breaking technical support at $107 and creating a lower low. If the dollar’s downtrend continues, it could provide a sustained tailwind for equities—specifically the multi-nationals—along with commodities like gold.
Source: Charles Schwab Corporation
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