This Week's Key Financial Catalysts

The past week has been marked by significant economic developments, trade policy adjustments, and inflation concerns that have rattled financial markets. The S&P 500 and Nasdaq Composite saw sharp declines early in the week due to renewed tariff fears, only to recover midweek before succumbing to another sell-off on inflation concerns. A mix of economic data, corporate earnings, and geopolitical uncertainty fueled the market's volatility, making it a challenging environment for investors.

Economic News: PMI Growth and Inflation a Threat

The release of multiple economic indicators throughout the week painted a mixed picture of U.S. economic health. The January S&P Global US Manufacturing PMI rose to 51.2, reflecting expansion in the sector for the first time in over two years. Similarly, the ISM Manufacturing Index climbed to 50.9%, signaling improved demand. However, December factory orders declined by 0.9%, with weakness primarily concentrated in the transportation sector.

One of the most anticipated reports, the January jobs report, showed nonfarm payrolls increased by 143,000, with a historically low unemployment rate of 4.0%. While this data suggested resilience in the labor market, a 0.5% increase in average hourly earnings raised concerns about wage-driven inflation. The preliminary University of Michigan Consumer Sentiment survey further fueled inflationary worries, showing inflation expectations rising to 4.3%, the highest level in over a year.

The inflation concerns took center stage toward the end of the week as a result of these economic announcements, as rising wages and higher consumer price expectations stoked fears of persistent inflationary pressures. The bond market reflected these worries, with the 10-year Treasury yield (this week’s chart of the week) climbing to 4.50% and the 2-year yield rising to 4.28% following the release of the consumer sentiment survey.

The persistent rise in unit labor costs, which increased by 3.0% in the fourth quarter, suggests that inflationary pressures are becoming more entrenched. The Federal Reserve’s challenge remains balancing economic growth with inflation control. Markets had previously expected the Fed to continue easing monetary policy, but this week’s data may force the central bank to reconsider the timing of future rate cuts.

Trade and Tariff Developments: A Double-Edged Sword

The imposition of new tariffs by the U.S. administration on imports from Canada, Mexico, and China sent shockwaves through financial markets at the beginning of the week. The U.S. announced a 25% tariff on various goods from Canada and Mexico (with a lower 10% rate for Canadian energy) and a 10% tariff on Chinese imports. The initial market reaction was negative, with the Dow Jones Industrial Average falling more than 650 points at its worst level.

However, a reprieve came when Mexico’s President Claudia Sheinbaum announced that she had secured a temporary pause on tariffs for one month after a conversation with President Trump. Subsequently, Canada also received a 30-day reprieve from tariff actions, and China’s retaliatory measures were deemed more symbolic than substantial.

Despite these developments, uncertainty lingers. Reports surfaced on Friday that President Trump is considering additional reciprocal tariffs, raising concerns about prolonged trade disruptions. The widening U.S. trade deficit in December, which increased to $98.4 billion from $78.9 billion in November, underscores the potential economic impact of ongoing trade tensions. If companies begin stockpiling inventory ahead of potential tariff hikes, this could further distort economic data and inflation trends in the months ahead.

Corporate Earnings: Winners and Losers

The week also saw a flurry of corporate earnings reports that influenced market sentiment. Among the standout performers were Palantir Technologies (PLTR), which surged 24% after reporting a 75% gain in earnings per share and a 36% jump in revenue, and Spotify (SPOT), which gained 13.2% on strong earnings results.

On the flip side, some companies disappointed investors. Alphabet (GOOG) saw a sharp 6.9% decline after reporting earnings that failed to meet high expectations, exacerbated by its announcement of a $75 billion capital expenditure plan for 2025. Similarly, Amazon (AMZN) fell 3.8% after issuing weaker-than-expected Q1 revenue guidance and outlining plans for $100 billion in capital expenditures next year. The announcement of heavy spending by these tech giants did provide a boost to AI chip stocks such as Nvidia (NVDA) and Broadcom (AVGO), which are expected to benefit from increased demand for computing power. I would not sell AI companies solely on the DeepSeek low-cost news from last week. I believe US corporations are in an arms race to build the best data centers, with the best equipment. The earnings news this season suggests they don’t plan to slowdown spending plans.

Consumer-facing companies had mixed results. Estee Lauder (EL) plunged 16.1% after posting disappointing earnings, while Merck (MRK) and PepsiCo (PEP) also saw sharp declines. In contrast, luxury and consumer staple companies, including Tapestry (TPR), Ralph Lauren (RL), and Phillip Morris (PM), reached 52-week highs, reflecting strength in premium brand spending.

Chart of the Week

The 10-year Treasury yield has been a big focus for me over the past few years. Rising rates have been a headwind for US stock valuations every time the 10-year yield has approached 5%. Michael Kantrowitz, Chief Strategist of Piper Sandler showed Friday how price returns have been highly correlated to the direction of yields since 2023 with the S&P 500 down 4.9% on weeks the 10-year yields were up compared to the S&P 500 up 67.2% on weeks that the 10-year yield was down, cumulatively during the 2023 to present period.

The technical pattern on the 10-year yield indicates a short-term top in yields when the yield dropped below the 50-day moving average recently. Any further decline in yields correlates well with rising stock prices. This is a pattern to look closely at in the weeks ahead, especially as new inflation data could reverse the short-term trend.

Market Outlook: Navigating an Uncertain Future

The week’s events have left investors grappling with a complex economic landscape. The combination of strong labor market data, rising wages, and renewed trade tensions suggests that inflation could remain a persistent concern. If inflation continues to trend upward, the Federal Reserve may be forced to delay or reduce the magnitude of rate cuts, which could weigh on market sentiment.

At the same time, corporate earnings have shown pockets of strength, particularly in AI-driven technology stocks. The heavy capital expenditure plans announced by Alphabet and Amazon underscore the ongoing investment in AI and cloud computing, which could provide long-term growth opportunities despite short-term market volatility.

For investors, the key takeaways from this week are:

1. Monitor inflation data closely – Wage growth and consumer inflation expectations will play a critical role in determining the Federal Reserve’s next moves.
2. Trade policies remain a wildcard – Any new tariff announcements could create sudden volatility in equity markets and impact global supply chains.
3. Stock selection is critical – While some sectors face headwinds, areas like AI and cloud computing continue to see robust investment and growth while other late-stage cyclical groups may benefit from a rise in the manufacturing data – for the first time in a couple of years.

As markets digest this week’s events, the coming weeks will be crucial in shaping expectations for interest rates, corporate earnings, and broader economic trends. Investors should remain vigilant and prepared for continued volatility as economic and political developments unfold, while underlying trends in AI, robotics, quantum computing, automation, and self-driving cars continue to take shape with many years of development ahead.

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