Rebound bid still intact after economic data

The CPI swoon didn’t last long, as the major equity indices and the Treasury market rebounded nicely in Wednesday’s trade, none more so than the Russell 2000 (+2.4%).

It was a textbook buy-the-dip trade that proved successful yet again. Granted it wasn’t a total success, meaning the major indices didn’t recover all that they had lost in the wake of the hotter-than-expected CPI Report for January, but they showed rebound verve, ending yesterday roughly at their highs for the session.

Although there was some selling interest off the openings highs, there wasn’t really any follow-through selling interest. The S&P 500 never went below Tuesday’s closing level (4,953) and ended the day back above the closely-watched 5,000 level.

The rebound effort was aided by a drop in market rates, which was aided by Chicago Fed President Goolsbee’s conciliatory view that the Fed should not wait for inflation to get to 2.0% before cutting rates. Mr. Goolsbee does not have a vote on the 2024 Federal Open Market Committee.

Nonetheless, the 2-yr note yield dropped nine basis points to 4.58% and the 10-yr note yield fell five basis points to 4.27%. Rates have come in further this morning, too, following the release of a large slate of economic data.

• Retail sales declined 0.8% month-over-month in January (Briefing.com consensus -0.2%) following a downwardly revised 0.4% increase (from 0.6%) in December. Excluding autos, retail sales declined 0.6% month-over-month (Briefing.com consensus 0.1%) following an unrevised 0.4% increase in December.
  • The key takeaway from the report is that it reflects a slowdown in spending on goods in January. Some brutally cold weather during the month will get some blame for the slowdown, but that excuse falls short as the primary driver knowing that sales at nonstore retailers (the bulk of which are online retailers) declined 0.8% month-over-month.
• Initial jobless claims for the week ending February 10 decreased 8,000 to 212,000 (Briefing.com consensus 221,000). Continuing jobless claims for the week ending February 3 increased 30,000 to 1.895 million.
  • The key takeaway from the report is that the low level of initial claims support an economy operating in growth mode; however, the rising level of continuing jobless claims underscores a rising level of challenge in finding a new job after a layoff.
• January import prices increased 0.8% month-over-month. Excluding fuel, import prices were up 0.7%. Export prices also increased 0.8% month-over-month. Excluding agricultural products, export prices were up 0.9%.
  • The key takeaway from the report was the deflation seen in year-over-year readings. Import prices were down 1.3% (and down 0.3% excluding fuel) while export prices were down 2.4% (and down 1.6% excluding agricultural products).
• The February New York Empire State Manufacturing Index checked in at -2.4 (Briefing.com consensus -9.0) following a -43.7 reading for January. The dividing line between expansion and contraction for this series is 0.0, so the February reading connotes an ongoing contraction, albeit at a much slower pace than what was seen in January.
• The February Philadelphia Fed Index checked in at 5.2 (Briefing.com consensus -9.0) versus -10.6 in January. The dividing line between expansion and contraction for this series is 0.0, so the February reading reflects an expansion in manufacturing activity in February.

Treasury yields dropped further in the wake of these reports, which were indicative, on balance, of a softening in economic activity that is going to feed the market’s rate-cut optimism. The 2-yr note yield is down seven basis points to 4.51% and the 10-yr note yield is down six basis points to 4.21%.

Equity futures, in turn, moved higher but subsequently lost some steam.

Currently, the S&P 500 futures are up five points and are trading 0.1% above fair value, the Nasdaq 100 futures are up 16 points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 67 points and are trading 0.2% above fair value.

The major indices, therefore, are slated to keep their rebound bid going at the open, notwithstanding weakness in Dow component Cisco (CSCO), farm equipment maker Deere &Co. (DE), and, yes, even NVIDIA (NVDA), which is down 0.3%.

There is more economic data to come, including the January Industrial Production and Capacity Utilization Report at 9:15 a.m. ET, the December Business Inventories Report at 10:00 a.m. ET, the Febraury NAHB housing Market Index at 10:00 a.m. ET, and January Net Long-Term TIC Flows at 4:00 p.m. ET.

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Originally Posted February 15, 2024 – Rebound bid still intact after economic data