Dow up nearly 300 points as investors await potential inflation-data ‘wrecking ball’

What’s driving markets

Stocks fell last week as traders noted a tick up in bond yields that suggested the U.S. central bank may have to increase borrowing costs by more than recently thought. The focus for the early part of this week is on the Tuesday morning release of the January consumer-price index.

See: Why the stock market’s ‘FOMO’ rally paused and what will decide its fate

Futures pointed to the Fed taking borrowing costs to 5.2% by August. A few weeks ago that terminal rate was seen below 5%, a lower peak that had encouraged stocks to rally hard at the start of the year.

“Given the hawkish tone to last week’s Fedspeak, all eyes will be on Tuesday’s CPI report for January. Traders will think a more robust CPI print would look less like a one-off and more like part of a trend, which could have a more pronounced impact on the market’s view of the terminal,” said Stephen Innes, managing partner at SPI Asset Management, in a weekend note.

“Indeed, this week’s U.S. inflation data has the potential to move like a wrecking ball through a market with a more relaxed inflation outlook that investors have been enjoying in recent months,” Innes added.

Read: Inflation data rocked the U.S. stock market in 2022: What investors need to know about Tuesday’s reading

Economists forecast that the headline year-over-year January CPI inflation reading will fall from 6.5% in December to 6.2%.

Check out: CPI in the spotlight: Fed worried about sticky inflation

Stocks have rallied in 2023, extending a bounce off October lows, and remain up solidly despite last week’s selloff.

“Hopes for a soft landing have grown, but the cumulative effects of the Fed’s rate hikes are likely to eventually stall growth. Unfortunately, this pattern of premature hope seems to occur in most market cycles, as it did in 2006 right before a relatively meaningful economic downturn,” said Michael Reynolds, vice president of investment strategy at Glenmede, in a note.

Otherwise, it’s a slow start to the week for U.S. economic updates, with just the New York Fed 1-year and 5-year inflation expectations survey due for release at 11 a.m. Eastern.

Investors were also continuing to absorb the fallout from the fourth-quarter earnings season. So far, 69% of the S&P 500 have delivered their results and the outcome is lackluster, noted John Butters, senior earnings analyst at FactSet.

“Of these companies, 69% have reported actual EPS (earnings per share) above the mean EPS estimate, which is below the 5-year average of 77% and below the 10- year average of 73%. In aggregate, earnings have exceeded estimates by 1.1%, which is also below the 5-year average of 8.6% and below the 10-year average of 6.4%,” Butters said.

Some analysts expressed concern about the technical condition of the market after its latest relapse.

“The SPX [S&P 500] broke out above 4,100 in early February, but closed below it last week. That creates the potential for a ‘false breakout,’” wrote Jonathan Krinsky, chief technical strategist at BTIG in a note to clients.

“This comes as momentum is rolling over, rates and the dollar are breaking out, we are entering a seasonally weak period, and sentiment/positioning has come a long way from late December. Coming into this year we thought one of the key themes would be market’s focus shifting from inflation and the Fed to a weakening economy. At this point that view looks to be premature with yields attempting to breakout, commodities resilient, and stocks breaking lower,” he added.

Need to Know: Here are five companies to pick if Goldman Sachs is right about the stock market being flat in 2023

Companies in focus

• Shares of Nikola Corp.
  NKLA,
  +4.55%
  rose 3.5%, after The Wall Street Journal over the weekend reported that the electric-vehicle maker has started work on hydrogen plants that would be part of a fueling network.

• Shares of Meta Platforms Inc.
  META,
  +3.46%
  rose 3%, after the Financial Times reported that the social media giant had delayed setting up some team budgets as it prepares for a new round of job cuts.

• Merchant-acquiring company Fidelity National Information Services Inc.
  FIS,
  -13.87%
  plans to spin off its Worldpay merchant business, the company announced Monday. Shares were down 13.7%.