Stocks Bounce off Lows Following Fed Minutes…..

U.S. equities whipsawed to finish mixed following the release of the minutes from the Fed’s last monetary policy meeting, which offered no surprises. The report showed what has been widely expected—that rate hikes are likely coming soon, and it may be aggressive in winding down its balance sheet. Meanwhile, the markets also focused on a robust economic calendar, headlined by a stronger-than-expected read on January retail sales, though the figures were not inflation adjusted. Meanwhile, import prices came in hotter than expected, industrial production and capacity utilization topped forecasts, business inventories notched a seventeenth-straight monthly rise, and homebuilder sentiment cooled. Earnings news continued to pour in, with Kraft Heinz topping expectations, and Airbnb raising its guidance, while Roblox and Shopify saw pressure in the wake of their reports, and Viacom CBS fell well short of estimates and announced a name change. Treasuries were higher to put some downside pressure on yields, and the U.S. dollar was lower, while crude oil prices rebounded from yesterday’s drop, and gold traded to the upside. Europe finished mixed in a subdued session after yesterday’s broad-based advance, with U.K. inflation pressures coming in stronger than anticipated, while markets in Asia were mostly higher amid some inflation data out of China.

The Dow Jones Industrial Average fell 55 points (0.2%) to 34,934, while the S&P 500 Index increased 4 points (0.1%) to 4,475, and the Nasdaq Composite lost 16 points (0.1%) to 14,124. In heavy volume, 4.2 billion shares of NYSE-listed stocks were traded, and 4.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.59 to $93.66 per barrel. Elsewhere, the gold spot price traded $17.50 higher to $1,873.70 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 95.73.

Advance retail sales —not adjusted for inflation—for January rose by 3.8% month-over-month (m/m), versus the Bloomberg consensus forecast of a 2.0% rise, and compared to December’s negatively-adjusted 2.5% drop. Last month’s sales ex-autos grew 3.3% m/m, compared to expectations of a 1.0% gain and as December’s figure was revised downward to a 2.8% fall. Sales ex-autos and gas were up 3.8% m/m, versus estimates of a 1.0% rise, while December’s reading was adjusted down to a 3.2% fall. The control group, a figure used to calculate GDP, jumped 4.8% m/m, versus projections of a 1.3% increase, and following December’s negatively-revised 4.0% drop.

The Import Price Index rose 2.0% m/m for January, versus estimates of a 1.2% gain, and compared to December’s downwardly-revised 0.4% decrease. Versus last year, prices were up by 10.8%, compared to forecasts of a 10.0% increase and December’s downwardly-revised 10.2% rise.

The MBA Mortgage Application Index declined 5.4% last week, following the prior week’s fall of 8.1%. The downward move came as an 8.9% drop for the Refinance Index was met with a 1.2% decrease for the Purchase Index, as the average 30-year mortgage rate continued to climb, jumping 22 basis points (bps) to 4.05%.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in February slid to 82 from January’s 83 level, but in-line with estimates. The NAHB said, “Residential construction costs are up 21% on a year over year basis, and these higher development costs have hit first-time buyers particularly hard.” Further, the report noted, “Higher interest rates in 2022 will further reduce housing affordability even as demand remains solid due to a lack of resale inventory.”

The Federal Reserve’s report on industrial production showed a 1.4% m/m increase in January, versus estimates of a 0.5% rise, and compared to December’s unrevised 0.1% dip. The Fed said manufacturing output and mining production rose, while utilities jumped as the demand for heating surged in January with significantly colder-than-normal temperatures. Capacity utilization nudged higher to 77.6%, versus forecasts and relative to the prior month’s upwardly-adjusted 76.6% rate.

Business inventories rose 2.1% m/m in December, in line with forecasts after November’s upwardly-revised increase to 1.5%. Business inventories have increased for seventeen-straight months.

Finally, the Federal Open Market Committee’s (FOMC) released the minutes from its January monetary policy meeting. The Central Bank acknowledged higher inflation and a tighter labor market, while putting plans into motion to start raising interest rates and unload the massive amounts of bonds on its balance sheet. The report indicated that rate hikes are likely to begin soon, with some officials expressing concerns over financial instability by continuing with loose monetary policy. As well, Members felt that the unwinding of its balance sheet could be aggressive, saying, “Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate.”

Treasury yields have moved higher, with the short end of the curve decisively outpacing moves on the mid and longer ends, as the markets continue to grapple with expectations of what the implications could be for the economy.

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