Markets “In a Nutshell” for February 14, 2022
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average fell 1.00%, the S&P 500 was down 1.80%, and the NASDAQ fell 2.20%. Foreign stocks (MSCI EAFE) were up, rising 2.30%. Bond prices were flat for the week, with the 10-year U.S. Treasury ending the week at 1.92%. (Data source: Wall Street Journal)
The most recent inflation reading came out last week and CPI 7.5% year over year, exceeding estimates of 7.3%. This is the largest gain year over year since February of 1982. The market was expecting a high number and only dipped slightly on this most recent reading. As we move further into the year, inflation is expected to cool off a little as many believe we will see peak CPI growth in the next 2 to 3 months. Although inflation will start to come down, it is unexpected that prices will ever return to what they once were. When the year-over-year CPI number comes down, it is important to remember that it is being compared to just 1 year ago. This is why many believe the peak will be in March because April of 2021 was the first month we saw a spike in the CPI data.
Fed Rate Hikes
With the CPI data coming in hotter than expected, bond markets started to price in more rate hikes. There are now 7 rate hikes priced in and a greater than 50% chance that we see a 0.50% rate hike in March. This would be the first 0.50% rate hike since 2000 as opposed to the typical 0.25% hike. As the Fed sets up to raise rates for the first time since the Pandemic, other nations are already getting started raising rates. The 10-year rates in Europe moved about 0% for the first time in three years. In Japan, rates are the highest they have been since 2016 and are approaching the 0.25% cap they have set. As rates continue to rise around the World, the value of negative-yielding bonds has gone from $18 trillion to $4 trillion in the past 18 months. This will shrink even more as it is expected rates continue to rise around the World going forward.
When was the last time the United States had deflation also known as negative inflation? (Scroll Down for Answer)
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2) 2009. In 2009 CPI for the year was -0.4%, this was the first time since 1955 the United States had seen deflation.