US Market Weekly Update: Mixed Performance, Inflation, US Interest Rates, And Economic Data.

Wall Street stocks ended mixed on Tuesday after U.S. consumer price data for January offered little to change expectations about the Federal Reserve's path forward on interest rate hikes.

U.S. consumer prices accelerated as Americans continued to be burdened by higher rental housing costs, suggesting that the Fed will maintain its fight against inflation. The S&P 500, the US stock market index, declined by 0.3% during the past five days, making it the second week in a row to end in negative territory. However, the Nasdaq performed well with a 0.6% gain for the week. The Dow Jones Industrial Average closed the week on Friday with a 0.1% decline, making it the third consecutive week of losses, a pattern that has not been observed since September.

While Moving on to inflation, in January 2023, the US annual inflation rate dipped slightly to 6.4% from December's 6.5%, which is below the market's anticipated 6.2%. Although this is the lowest number recorded since October 2021, inflation is still more than three times higher than the Federal Reserve's target of 2%, indicating a widespread surge in prices, especially in the housing and services sectors.

“Inflation remains elevated, albeit it appears to be slowing,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis. “Looking at today's price action, I think it might be a little bit of profit-taking on the heels of strong year-to-date performance.”

The Consumer Price Index (CPI) rose by 0.5% compared to December, the highest recorded in three months, primarily due to the escalated cost of food, shelter, natural gas, and gasoline.

US Inflation Chart

The Federal Reserve increased the target range for the fed funds rate by 25 basis points to 4.5%-4.75% during its February 2023 meeting. Although the hike's size has been reduced for the second consecutive meeting, borrowing costs have risen to levels not seen since 2007. The minutes from the FOMC meeting held in February will be released on Wednesday, February 22nd, providing insights into the Federal Reserve's thinking behind the 25 basis point increase earlier in the month.

On the economic data front, the market will be focused on the release of the Personal Consumption Expenditures (PCE) price index on Friday morning. This index is the Federal Reserve's most closely watched measure of the rate at which prices are increasing throughout the economy. The latest update on the Federal Reserve's preferred inflation measure and the minutes from its latest policy meeting will be among the key highlights in the holiday-shortened week ahead. It's important to note that US stock and bond markets were closed on Monday for President's Day.

XAU/USD – Gold Drops to Six-Week Lows as Strong US Economic Data and Hawkish Fed Weigh on Metal

The US dollar and the US bond market, have been the main drivers of gold price action over the past months and with both of these markets effectively closed for the session, gold is likely to tread water for the next few hours. Gold prices fell to their lowest levels in six weeks on Friday, slipping below $1,830 per ounce. This decline was prompted by robust economic data and hawkish comments from Federal Reserve officials, which have been weighing on the metal's performance.

The latest economic reports showed that US producer prices rose by 0.7% month-on-month in January, marking the most significant increase in seven months and surpassing market expectations of 0.4%. In addition, weekly jobless claims surprisingly fell, indicating an improvement in the job market.

As per the latest Federal Open Market Committees (FOMC) Monetary Policy Meeting Minutes, all participants agreed more rate hikes are needed to achieve the inflation target while also favoring further Fed balance sheet reductions. Adding strength to the hawkish Fed Minutes were statements suggesting that a few participants favored a 50 basis point (bps) rate hike, while some believed there was an elevated risk of a recession in 2023.

These positive economic indicators came on the heels of strong retail sales data and a hotter-than-anticipated Consumer Price Index (CPI) reading, which have bolstered the case for further monetary tightening. The combination of these factors has contributed to a decline in gold prices, which are down approximately 2% for the week, on track to record their third consecutive weekly drop.

While gold is typically viewed as a safe haven asset that investors turn to in times of economic uncertainty, its performance can be negatively impacted by economic growth and rising interest rates, which make non-yielding assets like gold less attractive. As such, the hawkish comments from Federal Reserve officials, along with the strong economic data, have led to a decline in gold prices.

In the face of these developments, market participants will be closely watching for further signals from the Federal Reserve regarding the timing and magnitude of future monetary policy actions. Any indications of an accelerated timeline for interest rate hikes could further pressure gold prices in the short term.