Inflation Hits Highest Level in Four Decades

 Weekly Wrap Content for the week of Feb 11:

1. Week 6 major indexes performance;

2. Week 6 US sector indexes performance;

3. Major indexes weekly charts of support and resistance levels;

U.S

For the week ended Feb 11, all three major indexes ended the week lower, after previous two-week up streak. The technology-heavy Nasdaq Composite fared worst and ended the week down roughly 15% from its recent peak, still in correction territory. The tug of war between healthy earnings growth and fears over monetary tightening continued to dominate sentiment. Warnings from U.S. officials that a Russian invasion of Ukraine might be imminent may have also contributed to a late-week sell-off. Refer to major indexes’ weekly performance tables below.

Key highlights for the week/outlook:

1.    U.S Consumer Price Index(CPI) hits 40-year high. January’s inflation data released on Thursday rose to 7.5% from a year ago, exceeding the 7.3% estimate and making the largest gain since Feb 1982, triggering an immediate market reaction in both stocks and bonds. 

2.    Investors price in half-point(0.5%) rate increase in March. With St. Louis Fed President James Bullard expressing his support for raising rates by 1% by July, the 10-year U.S. Treasury note yield surpassed 2.00% for the first time since the summer of 2019. 

3.    Rate hikes. After the release of the inflation data, investors started ratcheting up their rate-hike expectations, and the bond market is now pricing in almost seven rate hikes this year.

SPX sectors in play

Seven out of 11 SPX sectors closed positive this week. Energy(XLE) stocks continued its rally as crude oil prices pushed above USD 94 per barrel this week. Financials(XLF) also among top performing sector. Technology(XLK) and Communication Services(XLC) lagged. It’s expected cyclical sectors and asset classes that have more valuation support would outperform the growth oriented high valuation stocks. Refer to below sector indexes weekly performance table.

Technically, DJI and SPX indexes closed in between their 200-250dma, but Nasdaq still below both MAs 200dma and is in correction territory with more than 10% from its recent peak.

DJI weekly chart

SPX weekly chart

Nasdaq weekly chart

China/HK

Chinese stocks rose amid supportive official comments and a perception that the country’s regulatory crackdown cycle had peaked. The Shanghai Composite Index (SSE weeklychart) gained more than 3% this week and was the top performer in my above indexes weekly performance table.

During the week, the People’s Bank of China (PBOC) said that loans for affordable rental housing would not count toward the limited amount banks can lend to the property sector. An article suggested that regulatory curbs on the internet sector would become more rules-based, raising the prospect that the government’s crackdown on the tech sector would ease.

In property sector news, cash-strapped developer China Evergrande Group plans to pay off its debt by restoring construction and sales activity, not by selling assets on the cheap, and vowed to complete 50% of pre-sold homes this year, Reuters reported.

In Hong Kong, the benchmark Hang Seng Index(.HSI weekly chart) also added 1.4% for the week, rebounded up to its 4-week high level.  

Singapore

STI index (STI weeklychart) closed at fresh 4-year new high in the week, its 2^nd week up in a row led by the banks. The expectation of rates hikes lifting bank stocks higher and higher.