WEEKLY MARKET SUMMARY
Global Equities: US stocks broke out of their early-2025 slump thanks to some good news on inflation and a very strong start to earnings season from the major banks. The S&P 500 ended the week with a gain of 2.9%, while the Dow Jones Industrial Average advanced 0.9% and the Nasdaq Composite gained 2.5%. Small Caps outperformed with a 4.0% weekly gain as rate-cut hopes were rekindled. Foreign Developed market stocks were 2.3% higher on the week, while Emerging Markets gained 2.4%.
Fixed Income: The 10-Year Treasury yield had looked poised to retest the 5% level recently, but soft inflation data triggered a pullback in yields to 4.6%, the biggest weekly decline since November 2024. Comments from voting member of the Federal Open Market Committee Christopher Waller helped nudge rates lower. Waller commented to CNBC that Fed rate cuts could exceed the market’s present expectations and there could be multiple cuts in 2025 if inflation continues its current path. High yield bonds also posted solid weekly gains, advancing 1.2%.
Commodities: US West Texas Intermediate (WTI) Crude prices were slightly higher during the week, advancing to $78/barrel. News of a potential ceasefire between Israel and Hamas had little impact on crude prices.
WEEKLY ECONOMIC SUMMARY
Inflation Softens: The latest reading of US consumer inflation was a welcome relief after several setbacks in recent months. The December Consumer Price Index (CPI) report showed an uptick in annual headline inflation from 2.7% to 2.9%, but investors were more focused on the Core (ex-food and energy) reading that showed softening inflation from 3.3% to 3.2% annually. The Fed typically puts more emphasis on core price inflation, through its alternative inflation metric, the Personal Consumption Expenditure Index (PCE), which will be released Jan 31st.
Producer Prices Also Decline: Input prices also showed signs of softening inflation in December, a welcome sign after the prior month’s report came in hot due to some one-off price surges. The Producer Price Index (PPI) was up 0.2% monthly for an unchanged 3.3% annual reading; however, the core (ex-food and energy) measure came in flat for the month. PPI is considered a leading indicator of consumer inflation, since input prices are passed along to consumers.
Strong Start to Earnings Season: As is customary, big banks were the first stocks to report for the fourth quarter 2024, and performance was strong across the board. JPMorgan (JPM), Goldman Sachs (GS), BlackRock (BLK), Wells Fargo (WFC), Citigroup (C), Bank of New York (BK), Morgan Stanley (MS), and Bank of America (BAC) all reported earnings that beat estimates. The SPDR Financial Select Sector ETF (XLF) surged to a 6.2% weekly gain and set a high bar for other sectors that will report over the coming weeks.
CHART OF THE WEEK
The Chart of the Week shows the SPDR Financial Select Sector ETF (XLK) over the past six months. Note the gap up in price that occurred in early November as markets celebrated the Trump victory as a favorable outcome for big banks. The celebration was short-lived, however, as hot inflation caused investors to dial back hopes for big corporate tax breaks, and the gap was filled on the downside price movement. Financials got two sources of good news this week, however, as cooler inflation and stellar corporate earnings combined to push XLF back above its 50-day moving average (blue line). XLF now has momentum to retest the prior high, although there remains much uncertainty over how Trump will deliver corporate tax cuts amidst calls for fiscal restraint in DC.
