More Fed Hawkish Speak Post-January Inflation

Equities were mixed and bonds were down as the Fed plastered the market with hawkish speeches last week.

The fourth quarter earnings season is beginning to wind down and things are improving. So far, 82% of S&P 500 companies have reported earnings with 68% having out-paced estimates (just below the 5-year average of 69%). On the revenue front, 65% of companies have exceeded estimates (below the 5-year average of 69%). The economic data has proven solid, which is why the Fed is continuing to be hawkish. Both the Chicago Fed (ANCFI) and St. Louis Fed (Financial Stress) measures of economic conditions have shown improvement over the last 7 consecutive weeks.

Last week, both CPI and PPI inflation data disappointed expectations. However, despite the less-than-expected drop, both CPI and PPI declined for the 7th consecutive month, on a year-over-year basis.

In past inflationary declining periods, the key economic measure did not achieve a straight-line drop from peak to trough. Meanwhile, Retail Sales data came in hotter-than-expected, meaning that the consumer is alive and well. The Fed knows this and is seeking to keep equities under control instead of combating inflation. This week, we’ll learn more about the state of the consumer. If the Fed’s favorite inflation barometer, PCE Prices, show a 4th consecutive drop, Fed speakers will pump up the hawkish volume.

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