Stocks End Lower as Inflation Concerns Flare
February 16, 2024
schwab.com
The major indexes ended the week on a soft note after stronger-than-expected producer price data dampens hope for lower interest rates.
(Friday market close) The S&P 500® index (SPX) faded from earlier gains and closed lower Friday, breaking a five-week winning streak after a higher-than-expected Producer Price Index (PPI) report echoed its consumer-based counterpart earlier this week, further deflating investor hopes for lower interest rates any time soon.
Early Friday, the Labor Department overall PPI rose 0.3% in January from December, a stronger increase than the 0.1% analysts expected. Core PPI, which strips out food and energy, jumped 0.5%, the highest monthly gain since last July and outpacing expectations for a 0.1% gain.
The PPI report followed unexpectedly stronger Consumer Price Index (CPI) readings Tuesday that rekindled concerns inflation may be perking up and prompted investors to further dial back expectations for Federal Reserve rate cuts.
This week's inflation numbers sent the 2-year Treasury note yield up sharply as investors scaled back hopes for Fed rate cuts, Joe Mazzola, director of trading and education at Schwab noted. Earlier Friday, the 2-year yield, which is particularly sensitive to Fed policy expectations, touched 4.72%, up from about 4.49% a week ago and its highest level since late December.
The higher-than-expected PPI figures were driven by services, "underlining the difficulty of taming sticky prices in this part of the economy," Mazzola said.
Despite this week's soft performance, the stock market remains near record highs, suggesting investors remain encouraged by earnings performance and the economic outlook.
"This week’s market action suggests stronger profits outweigh rate concerns for investors right now," Mazzola said. "Even with traders dialing back rate cut expectations, markets aren’t currently suffering major pullbacks. Strong profits and earnings revisions are still driving this market."
Here's where the major benchmarks ended:
- The S&P 500 index fell 24.16 points (0.5%) to 5,005.57, down 0.4% for the week; the Dow Jones Industrial Average® (DJI) lost 145.13 points (0.4%) to 38,627.99, down 0.1% for the week; the Nasdaq Composite® (COMP) declined 130.52 points (0.8%) to 15,775.65, down 1.3% for the week.
- The 10-year Treasury note yield (TNX) rose over 4 basis points to 4.285%.
- The Cboe Volatility Index® (VIX) rose 0.23 to 14.24.
Communications services and transportation shares were among the market's weakest performers Friday, while energy companies firmed behind strength in crude oil futures. The small-cap Russell 2000® Index (RUT) fell 1.4% Friday but still ended the week with a gain of 1.1%, its second straight weekly advance.
Stocks on the move
The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:
- Applied Materials (AMAT) surged 6.4% and ended at a record high above $202 after the semiconductor equipment company reported stronger-than-expected quarterly results.
- Coinbase Global (COIN) jumped nearly 9% after the cryptocurrency exchange reported an unexpected profit and higher-than-expected revenue for the fourth quarter.
- DoorDash (DASH) sank 8.1% after the food delivery service topped quarterly revenue expectations but also reported a worse-than-expected loss.
- Dropbox (DBX) plunged 23% after the cloud storage company's first-quarter revenue guidance disappointed investors.
- Nike (NKE) lost 2.4% after The Wall Street Journal reported the athletic apparel company plans to lay off 2% of its workforce, or over 1,600 people, as part of an effort to cut $2 billion in costs over the next three years.
- Roku (ROKU) tumbled 24% after the streaming service provider's fourth-quarter loss exceeded expectations.
- Trade Desk (TTD) soared more than 17% after the company, which operates a cloud-based platform for advertising buyers, released stronger-than-expected first-quarter guidance.
- Yelp (YELP) shed more than 14% after the online review platform issued weaker-than-expected full-year guidance.
Earnings season is winding down with about 80% of companies having reported results through this week. But next week marks the unofficial start to retail earnings season, with Home Depot (HD) and Walmart (WMT) both scheduled to report results Tuesday.
Earnings from big-box chains and other retailers are likely to be a keen interest after Thursday’s unexpectedly weak January Retail Sales report raised concern over the outlook for consumer spending that had been surprisingly robust much of 2023. Comments from retailers' management during earnings calls could be closely followed for that reason. Signs of softer consumer spending could make it difficult for many retailers’ shares to extend a strong start to the year.
Also next Wednesday, semiconductor leader Nvidia (NVDA) is scheduled to report quarterly results. Nvidia shares lead "Magnificent Seven" companies with a gain of about 47% so far in 2024. The stock soared 239% in 2023 amid escalating bullishness over demand for artificial intelligence-capable chips.
Nvidia's earnings "could be a major market catalyst given the recent AI-driven frenzy," Schwab's Mazzola said.
Bumpy road to 2% inflation
Economic numbers this week appeared to deliver a rude awakening or reality check for investors. Many had been driving stocks higher amid growing confidence that the Fed was near a policy "pivot" toward lower rates and ideas a "soft landing" that could avoid recession was near.
Instead, the latest CPI and PPI numbers provided reminders that inflation remains above the Fed's 2% long-term target, which makes any near-term drop in the central bank's benchmark funds rate unlikely. Many analysts now see an initial rate cut happening in June at the earliest.
Friday's PPI report showed that costs of services continued to climb even as goods prices lagged. The Labor Department said overall PPI rose 0.9% year over year in January, a slight slowdown from 1% in December but still above analysts' estimates for an increase of 0.6%.
"The report is disappointing since price increases from producers may mean that companies could continue to pass along higher prices to consumers," said Collin Martin, a director of fixed income trading at the Schwab Center for Financial Research. The report "pushed back Fed rate cut expectations once again."
Late Friday, traders priced in nearly 90% odds the funds target will remain unchanged at 5.25% to 5.5% following the March Federal Open Market Committee (FOMC) meeting, according to the CME FedWatch Tool. The tool shows a 66% chance the funds rate will be unchanged after the FOMC's May meeting, up from 39% a week ago.
Today’s PPI report "reiterated that the path to 2% inflation is likely to be a long and bumpy road," added Cooper Howard, director of fixed income Strategy at the Schwab Center for Financial Research.
In other economic news Friday, January Housing Starts and Building Permits both were below expectations at a seasonally adjusted annual rate of 1.331 million and 1.47 million, respectively. However, December starts were upwardly revised. Analysts had expected Housing Starts and Building Permits to both rise slightly in January from December, to a seasonally adjusted annual rate of 1.47 million and 1.51 million, respectively.
Monday is the U.S. Presidents Day holiday and markets will be closed.
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