I make it a point during every MTM Monday Morning Meeting to highlight the connection between the markets that move money. Central banks set interest rates that have a direct impact on bond prices and currencies. Foreign exchange rates influence stocks, metals and energy, as well as many other commodities. A mixture of all these markets and earnings completes the chain of major market movements. For the past couple of years, prices or inflation figures have had the most impact on direction. However, there may have been a fundamental shift this past week.

Price Pressure

Stock indexes softened in 2022 in response to rising prices in most sectors of the economy. The tech sector (Nasdaq) took the biggest hit, followed by the bank-heavy S&P. Meanwhile, the Dow Jones industrials performed the best in a dismal year. The small cap index Russell suffered as well.

Rising inflation played the title role. The monthly inflation figures (CPI, PPI and PCE deflator) instigated the most volatile days over the past year. FOMC meetings and Fed Chair Powell statements were also integral events that drove many markets. Any report that had a price component frequently eclipsed the most reliable technical tools. Thus, inflation numbers set the tone for FOMC monetary policy.

The Fed has two mandates. One is to promote full employment, which was not an issue last year. The other is to use their tools to maintain price stability. They failed miserably on that front. Admittedly, they hesitated too long to counter rising inflation. Thus, they were forced to cool down spending with aggressive interest rate hikes throughout 2022. As of Jan. 1, traders were betting on rates hikes in the first two FOMC meetings this year.

Recession Fear

On Wednesday, Jan. 18, there may have been a shift in focus from inflation data to mounting recession fears. Retail sales and manufacturing data have been deteriorating. Furthermore, some top companies have announced layoffs. The Fed is attempting to navigate a soft landing from the inflationary cycle. However, now it appears they will have to let off the brakes (rate hikes) so as not to push the economy into a deep recession.

We are at a crossroad. For the first time in a while, stocks fell sharply on weak sales data and ignored a soft PPI report. The raft of rate hikes appears to have finally impacted spending. Thus, after two years inflation reports may be second in importance to other economic reports, such as GDP, employment, manufacturing, sales, housing and consumer sentiment.

Statistical Cycles

Ranking the importance of economic reports goes through cycles. The best way to gauge impact is compare the following markets (ETFs) immediately after a vital statistic is reported: bond (TLT), equity index (DIA, SPY, DIA, IWM), gold (GLD), U.S. dollar (UUP) and you might as well throw in crude oil (USO).

Join MTM’s Monday Morning Meetings (it's free to join) to find out how the upcoming reports are scoring in order of importance.

John Seguin, Market Taker Mentoring