inflation data next week

US stocks crashed last week and the Dow Jones Index turned negative for the year. Next week, markets would be closely watching the inflation data as it might seal the fate of the FOMC meeting later this month.

Looking back at the last week, on Friday, the Nasdaq Composite lost 1.76% while the S&P 500 and Dow Jones respectively fell 1.45% and 1.07%. Small and mid-cap stocks were hit even more badly and the Russell 2000 Index fell almost 3%.

Overall, the Nasdaq Composite fell 4.71% during the week while the S&P 500 lost 4.55%. The Dow Jones fell 4.44% and has now turned negative for 2023 after the worst week since June 2022.

The Dow Jones has now closed with losses in five of the last six weeks while the S&P 500 has closed in the red in four of the last five weeks.

The last week was action-packed even as the earnings calendar was quite light. Among major names, Teladoc health posted better-than-expected earnings for its fiscal fourth quarter of 2023. However, the stock still crashed as it announced the departure of its CFO.

Meanwhile, Fed chair Jerome Powell’s Congressional testimony and February nonfarm payroll data were the key events last week, but both spooked markets.

Powell Touted More Rate Hikes to Tame Inflation

At his Congressional testimony, Federal Reserve chair Jerome Powell said that interest rates might need to rise higher than the Fed previously envisioned. He added that the US central bank might need to increase the pace of hikes to tame inflation.

In his remarks, Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

During his Congressional testimony, Powell vowed that the Fed is committed to lowering inflation to its targeted range of 2%.

High inflation is invariably negative for risk assets like growth stocks. However, some investment strategies can outperform during high inflation.

Meanwhile, the nonfarm payroll data for February came in at 311,000—significantly higher than the 225,000 that markets were expecting. The January data was revised down from 517,000 to 504,000. Markets were however expecting a bigger downward revision in the January reading.

However, in a slight relief for markets, average hourly earnings rose 4.6% in February which was lower than expected. On multiple occasions, Powell has said that strong wage growth is a dampener in lowering inflation.

SVB Debacle Took a Toll on US Stocks Last Week

Meanwhile, even as markets were reeling under the impact of Powell’s hawkish commentary, on Thursday, SVB Financial announced a capital raise amid plummeting deposits. The company also announced the sale of bonds at a loss of $1.8 billion.

Meanwhile, on Friday, regulators shut down the bank making it the first major bank failure since the 2008 financial crisis.

The fallout of SVB Financial’s collapse was visible in regional banks in particular and the SPDR S&P Regional Bank ETF fell almost 4.4% on Friday.

Tech and healthcare accounted for the bulk of SVB’s clientele and after its failure, a lot of startup companies are facing trouble processing payrolls.

Cryptocurrencies also fell last week and briefly bitcoin prices fell below $20,000. Crypto prices have been weak over the last year. However, many analysts and fund managers like billionaire Paul Tudor Jones advise allocating some money to cryptocurrencies- read our guide on how beginners can trade in cryptocurrencies.

February Inflation Data to be Released Next Week

In January, US CPI (consumer price inflation) rose 0.5% on a monthly basis and 6.4% on a YoY basis. Wholesale inflation also inched up in the month and both readings were ahead of estimates.

Notably, both readings came after Fed’s meeting which concluded on February 1. Next week, we’ll get the inflation data for February. It would be the last inflation reading before the FOMC’s March meeting. Analysts predict that US inflation rose 0.5% on a monthly basis in February.

Traders now see a higher probability of a 50-basis point rate hike this month. In the previous meeting, the Fed raised rates by 25 basis points and said that the process of “disinflation” has started.

However, the January CPI data shattered the narrative and markets now look forward to the February inflation data.

We’ll also get the February retail sales data next week. In January, US retail sales were better than expected. However, last month, retail giants including Walmart, Home Depot and Target provided tepid guidance for the current quarter.

Key Earnings to Watch Next Week

The earnings calendar for the next week is quite light. However, we’ll still get quarterly reports from names like Adobe, FedEx, and Xpeng Motors. FedEx’s earnings would offer insights into the health of the US economy as the logistics giant is a bellwether of the economy as well as e-commerce activity.

Over the last year, Xpeng Motors has disappointed markets with its performance. It delivered 6,010 vehicles in February which it said was 15% higher than in January. However, its deliveries fell as compared to February 2022 when it had delivered 6,225 cars. In contrast, NIO and Li Auto reported a YoY rise in February deliveries.

For two consecutive months now, Xpeng Motors’ deliveries have come below 10,000. The company has been looking to increase sales to Europe and said that it has opened a second retail store in both the Netherlands and Denmark.

All said, after the last week’s turmoil, markets now look forward to next week’s inflation data which would be a key determinant of the Fed’s policy action later this month.

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