Market Update: February 17, 2023

Welcome to the Weekly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth, and here’s what happened in the market this week.

 

The market started off the week strong but finished with a tough Thursday spurred by news of possible resurgent inflation. For the month of February, we are currently in a sideways trading pattern and remain above a key support level right at 4050.

In the news this week, Facebook parent company Meta gives thousands of “subpar reviews” as management signals another round of layoffs. An AI chatbot coupled with Bing sees multiple bugs forcing Microsoft to address concerns on their new AI-enabled search engine. And January producer prices unexpectedly increased prompting concerns on persistent inflation.

So lets dive into the latest inflation readings. While it’s true that total CPI has been decreasing for a number of months now, the pace of that deceleration has really slowed this month. While the total CPI reading is certainly useful, the devil is in the details.

If you look at sticky vs flexible CPI, flexible CPI has been the primary driver of the pullback in inflation. Flexible CPI, shown here in brown, measures price changes of products that are often volatile and almost always temporary. Sticky CPI on the other hand, measures price changes of products that essentially never return back to their previous prices. As you can see, flexible CPI has pulled back significantly whereas sticky CPI has not.

Herein lies the problem. Year-over-year sticky CPI, shown in orange, continues to move higher because the month-over-month CPI remains elevated as well. Both remain unusually elevated, well above the historical average from the previous business cycle. Sticky CPI is ultimately the better indicator of forward inflationary readings and if this remains elevated, then we should expect this years inflation readings to remain stubbornly high.

Which ultimately means the Federal Reserve will be compelled to keep interest rates at higher levels for longer.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved February 17, 2023, from FactSet Database.

2.US Bureau of Labor Statistics. Graphics for Economic News Release. “12-month percentage change, Consumer Price Index, selected categories (past 20 years).” Updated February 14, 2023. Retrieved from https://www.bls.gov/cpi/

3.Atlanta Federal Reserve. “Stick-Price CPI”. Updated February 14, 2023. Retrieved from https://www.atlantafed.org/research/inflationproject/stickyprice

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