Stocks and Bonds Gain Despite Higher Inflation Report

Last week, the Dow (+0.4%), NASDAQ (+3.1%) and S&P 500 (+1.9%) gained for the week, erasing most of the losses from the prior week.  Taxable bonds were up sharply, gaining about 0.9%, while tax-free municipal bonds gained about 0.1%.  The 10-year Treasury yield fell 0.08% to finish the week at 3.96%, which contributed to the gains in bond values.

In economic news, two key inflation reports were released last week, and gave different results.  The most commonly known inflation measure, Consumer Price Index (CPI), showed that inflation rose in December, compared to the prior month.  Inflation has been coming down for about 1.5 years, but the concern is if it begins to rise again.  Of course, one month of data does not make a trend, but it certainly creates some anticipation for next month’s report.  Conversely, the Producer Price Index (PPI) actually went down 0.1% compared to the prior month.  The PPI measures how much the suppliers are paying for their goods, so that reduction is encouraging.  The inflation reports are important as they will likely have an impact on the Fed’s decision to cut rates, or even possibly raise them again.

There will be a flurry of economic data released this week, but none will hold a candle to the onset of corporate earnings season.  With elevated expectations of solid earnings reports, companies’ stock prices could get punished if they produce disappointing earnings results or forecasts.  On the geopolitical front, tensions are rising in the Middle East, and the candidate who won the Taiwan election is not a fan favorite of the Chinese government, so tension could rise over there as well.  These will have little direct impact on the US economy, but there is always a concern of how much these could escalate into involving the US deeper into the conflicts.  It’s not a big issue that will drive markets, but one to keep in consideration, as these situations could cause some volatility in global stock markets.

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