Thursday was a mixed day for the U.S. stock market, as investors weighed the implications of a higher-than-expected inflation report, corporate news, and economic data. The three major indices ended the day with little change, as the market sentiment remained cautious.
Inflation and Rate Cut Expectations
The Consumer Price Index (CPI) report showed that inflation rose by 3.4% in December, the highest level since 1991, while the core inflation rate dropped slightly to 3.9%. This led investors to revise their expectations for a Fed rate cut in March, lowering the odds to about 65%. The main drivers of inflation were higher costs for shelter, car insurance, and used vehicles. Energy and food prices also rose, while some categories like household items and personal care products declined.
Corporate Milestones and Setbacks
On the corporate front, Microsoft grabbed the spotlight by becoming the most valuable U.S. company, with a market cap of $2.875 trillion, surpassing Apple. On the other hand, bank stocks suffered losses ahead of their earnings reports, with JPMorgan, Bank of America, and Wells Fargo all dropping. Citigroup also fell by 1.8% after announcing over $3 billion in one-time charges.
Coinbase, the largest cryptocurrency exchange in the U.S., saw its shares slide by 6.7% after the SEC approved the first Bitcoin ETFs that track the spot price of the digital currency. This signaled the market’s reaction to the regulatory changes in the crypto space.
Government Budget Deficit and Economic Indicators
The U.S. government budget deficit widened to $129 billion in December, much higher than the $85 billion deficit a year ago and missing the market forecast. Spending increased by 3% to a record high of $559 billion, driven by more Social Security payments and higher interest on the public debt. Revenue decreased by 6% to $429 billion.
Housing Market and Mortgage Rates
The housing market faced some headwinds, as the average rate on a 30-year fixed mortgage rose slightly to 6.66%, following the increase in Treasury yields. The higher mortgage rates, coupled with the low inventory, made it harder for homebuyers to find affordable homes. Homebuyers were advised to look for existing state and local programs that offer down payment assistance.
Labor Market and Unemployment
The labor market showed signs of strength, as the number of Americans filing for unemployment benefits dropped to 202,000. The lowest level since 1969 and well below the market estimate. Continuing claims also fell, giving the Fed more room to keep its hawkish stance until 2024 if needed. The four-week moving average decreased, smoothing out the weekly fluctuations.
The U.S. dollar index rose to 102.6, the highest level in almost a month. As the recent data supported the view that the Fed would delay cutting interest rates. The euro weakened against the dollar as the U.S. data contrasted with the expectations of a sooner rate cut.
As usual in the US markets, the earnings season is started by the largest Wall Street banks: JPMorgan, Bank of America, Wells Fargo and Citigroup. Market analysts expect JPMorgan EPS to increase to $3.71; Bank of America will decrease to $0.69; Wells Fargo will increase to 1.18 (almost double); Citigroup will decrease to $1.01.
The market was influenced by a variety of factors on Thursday, including inflation, corporate news, and economic data. Investors were cautious as they adjusted their expectations and watched the actions of the central bank, the regulators, and the companies.