This Week's Key Financial Catalysts

This week, the financial markets experienced notable activity driven by economic data (inflation in particular), tariff announcements, and corporate earnings. While inflation readings were hotter than expected, and new tariffs were announced, the market displayed resilience, supported by strong earnings reports and optimism around possible negotiations to ensue over the next couple of months before tariffs take hold.

Tariff Announcements and Market Reaction

The announcement of new 25% tariffs on steel and aluminum by President Trump attracted attention, though the market response was relatively muted. The tariffs, set to take effect in March, led to gains in related sectors. Nucor (NUE) and Alcoa (AA) stocks rose in response, reflecting investor optimism about domestic steel and aluminum producers' potential benefits.

Thursday, President Trump announced another set of tariffs, but market participants were reassured by the limited scope and delayed implementation of these reciprocal tariffs. The plan, scheduled to begin in April on a case-by-case basis, reduced fears of immediate economic disruption and raised hopes that negotiations might prevent the tariffs from being enacted. This optimism was further supported by news that President Trump would be in direct contact with Xi Jinping and Vladimir Putin to propose a mutual reduction in defense spending by half and continued efforts toward denuclearization.

Inflation Data: A Mixed Bag

The release of the January Consumer Price Index (CPI) report introduced some turbulence into the markets. The CPI showed a 3.0% year-over-year increase, slightly higher than December's 2.9%, while core CPI rose to 3.3% from 3.2%. These readings, particularly the month-over-month increases of 0.5% for total CPI and 0.4% for core CPI, signaled ongoing inflation pressures.

Treasury yields reacted accordingly, with the 10-year yield climbing to 4.64% and the 2-year yield reaching 4.37%. The hotter-than-expected CPI data raised concerns about potential delays in rate cuts by the Federal Reserve. However, Fed Chair Powell's testimony to Congress reinforced the central bank's patient stance, indicating no urgency to adjust rates.

Further inflation insights came from the Producer Price Index (PPI), which rose 0.4% month-over-month, exceeding expectations. Core PPI, excluding food and energy, increased by 0.3%. The year-over-year readings showed slight improvements, but only because December figures were revised upward. These data points suggest persistent inflationary pressures, particularly in service sectors.

Earnings Season Fuels Optimism

Amid the macroeconomic noise, corporate earnings provided a positive counterbalance. Companies like McDonald's (MCD), Rockwell Automation (ROK), and Monday.com (MNDY) delivered impressive results, boosting investor confidence. McDonald's reported strong same-store sales growth, helping its stock climb 4.8% on the day. Rockwell Automation surged 12.7%, while Monday.com soared 26.5% after exceeding growth expectations after their earnings announcements.

Cisco Systems (CSCO) advanced after reporting solid quarterly results, reinforcing the tech sector's leadership role in the broader market rally and the continued infrastructure build related to AI.

Consumer discretionary stocks saw mixed performance. MGM Grand (MGM) jumped 17.5% after releasing strong earnings, and Molson Coors (TAP) climbed 9.5%. In contrast, concerns about consumer spending persisted following weak retail sales data for January.

FactSet’s John Butters recently reported on the earnings season highlights today. He notes that the “blended (year-over-year) earnings growth rate for the S&P 500 is 16.9%...the highest (year-over-year) earnings growth rate reported by the index since Q4 2021.” He also notes that this earnings season investors have rewarded positive earnings surprises less than average and the percentage of companies beating revenue estimates is below average (5-year) which may be a result of the high price-to-earnings multiple on the S&P 500 and the run up in the index performance last year; however, the percentage of companies issuing negative earnings guidance for Q1 is below the average (5-year) – which is a good thing. Looking forward, he states analyst are predicting 8.1% earnings growth for Q1 and 12.7% for the year 2025.

Economic Indicators: Signals of Caution

Economic data beyond inflation added layers of complexity to the market narrative. The New York Fed's Survey of Consumer Expectations showed stable short- and medium-term inflation projections but a slight uptick in five-year expectations to 3.0%. Additionally, the NFIB Small Business Optimism Index fell to 102.8 from 105.1, reflecting growing concerns about inflation and business conditions.

Initial jobless claims fell 7,000 to 213,000 for the week ending February 8. Continuing claims also decreased 36,000 to 1.85 million. The key to the reports is that these are low levels and indicative of employers’ reluctance to let employees go.

Retail sales data further underscored potential consumer caution. The 0.9% decline in January was more pronounced than expected, with notable pullbacks in goods spending. Analysts attributed part of this weakness to abnormal weather but also noted signs of demand softness. The data flies in the face of intuition and some fundamental analysts, like Piper Sander, believe consumers will likely pull forward demand ahead of price increases related to tariffs.

Industrial production increased by 0.5%, driven entirely by a surge in utility output due to cold weather. Manufacturing and mining activity remained stagnant, highlighting the uneven nature of the recovery in U.S. industry.

Chart of the Week

This week we look at the relationship between the Consumer Discretionary sector and the Consumer Staples sector. The relationship often correlates with a risk-on or risk-off sentiment for investors. In times when staples are outperforming, the broad indices are often in a corrective mode. Changes in the relationship of often helpful to flag these turning points as part of a larger dive into market technical indicators. The chart below shows a few troubling items including momentum divergence warning for a possible trend change and the violation of the trend line this week. The Relative Strength Indicator (RSI) holding above 40 is still a positive that would indicate this is just a typical pullback in an ongoing bullish trend. With the two red flags, however, it’s time to watch this relationship daily for more indication of weakness. The retail sales figure today, while mostly weather-related, is yet another reason to watch for a shift to defensive staples.

Market Sentiment and Outlook

Despite the mixed data and tariff news, investor sentiment remained broadly positive. The S&P 500 neared its all-time high, buoyed by strong earnings and the perception that inflation, while persistent, is not accelerating at a pace that would prompt immediate Fed action.

Looking ahead, market participants will closely watch the upcoming PCE Price Index report, scheduled for release on February 28. This measure, often favored by the Fed, will provide further clarity on the inflation trajectory and could influence projections for monetary policy adjustments.

In summary, the week highlighted the market's delicate balance between tariff developments, inflation concerns, corporate earnings, and economic results. While inflation readings came in hotter than expected and new tariffs were announced, strong earnings and stable consumer expectations helped maintain a positive market tone that allowed the S&P 500 to test its highs. A pause to the execution of tariffs and time to negotiate gave investors relief, but persistent inflation will continue to temper Fed expectations for rate cuts.

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