Wall Street celebrated its best day of 2023 so far, fueled by cooling inflation and strong bank earnings. December’s Consumer Price Index (CPI) report revealed a welcome surprise: disinflation is back on track. This positive news, coupled with impressive Q4 results from major financial institutions, sent markets soaring. Today, investors await retail sales data and further economic insights.
Following Tuesday’s lower-than-expected producer price data, the December CPI report confirmed a downward trend in inflation. Crucially, the annual core CPI rate, excluding volatile food and energy prices, showed a continued decline.
Key indicators like shelter and services prices moderated, pushing the 6-month annualized core CPI rate below the Federal Reserve’s 2% target for the first time in four years. This significant development suggests the Fed’s aggressive rate hikes may be starting to have the desired effect.
The encouraging inflation data triggered a substantial rally in U.S. Treasuries and global sovereign bonds. The yield on the 10-year Treasury note plummeted 15 basis points before stabilizing around 4.66%. Futures markets now price in a 50% chance of a second Fed rate cut this year, a scenario previously considered unlikely.
The U.S. dollar weakened in response to the bond rally, with the dollar/yen pair hitting a new yearly low amid growing speculation of another interest rate hike by the Bank of Japan next week.
The positive sentiment extended to U.S. equities, further boosted by robust fourth-quarter earnings reports from major banks. Goldman Sachs, Citi, and Wells Fargo all saw gains exceeding 6%. The S&P 500 bank index, already outperforming the broader market in January, surged an additional 3.4%.
Adding to the optimistic backdrop, a complex ceasefire agreement was announced between Israel and Hamas, offering a glimmer of hope in the geopolitical landscape. However, this news did little to curb rising crude oil prices, which remain near 6-month highs due to a tightening energy market.
Wall Street futures maintain most of Wednesday’s gains as investors anticipate more bank earnings reports on Thursday. Bond markets are particularly focused on upcoming economic data releases, including December’s retail sales report, providing insights into holiday season spending. Weekly jobless claims figures will also be closely scrutinized following last week’s surprisingly strong payroll report. The Philadelphia Fed’s January business sentiment survey rounds out the key data releases.
The Federal Reserve’s Beige Book, released Wednesday, indicated slight economic growth in late November and December, with modest increases in employment and prices. However, various Fed speakers cautioned that while the latest inflation data is encouraging, significant uncertainty remains regarding the coming months as the market awaits policy decisions from the incoming Biden administration.
In conclusion, Wednesday’s market rally signifies a positive response to easing inflation and strong bank earnings. However, upcoming economic data and the evolving policy landscape will continue to shape market sentiment in the days ahead. The interplay between inflation, interest rates, and corporate performance will remain crucial for investors navigating the current market environment.
