Do not expect volatility to ease as US CPI is due this week

After January’s surprisingly strong jobs report, the focus will be on consumer inflation in the week ahead and what it could mean for the Federal Reserve’s plan to raise interest rates.

Friday’s report of 467,000 jobs added in January confounded Wall Street economists, some of whom expected a negative number due to the impact of the Omicron variant on the workforce. The report was also shocking in other ways. Payrolls were also revised higher by 709,000 jobs in November and December, and wages grew at a hot 5.7% year-over-year pace in January.

The Consumer Price Index is reported on Thursday, and the University of Michigan’s Consumer Sentiment Survey is released on Friday. There are dozens of earnings in the week ahead, including pharmaceutical names such as Pfizer and Amgen, consumer staples like Coca-Cola, PepsiCo and Kellogg, and Walt Disney.

Despite a sharp jump in bond yields, stocks ended Friday with gains for the week. Large swings punctuated trading in the past week, and some individual names were highly volatile. Meta Platforms fell more than 26% in one day on earnings disappointment. PayPal also lost nearly 25% in a single session after issuing weak guidance, but Amazon jumped 13.5% Friday after its earnings.

Such volatility in individual names highlights the risks for investors in the top tech growth stocks that are among the largest names in the S&P 500. It is extremely difficult for investors, who have only known how to make money for 15 consecutive years by owning growth stocks, to change how they view the world. The volatility we have seen around earnings in some of these names is not a surprise.

Still, the S&P 500 rose 1.5% in the past week, closing at 4,500, a key technical threshold. The Dow was up 1%, and the Nasdaq was up 2.4% for the week. The Nasdaq is now 13% below its all-time high. The best sector for the week was Energy, which was up nearly 5%, followed by Consumer Discretionary stocks, up just under 4%. Financials were up 3.5%, and Tech was up about 1%.

Markets could remain volatile in the coming week. Yields saw a big move on hawkish comments from European and UK central bankers this past week. The move was
extended even more, after the Friday jobs report. The US 10-year yield, which influences mortgages and other loans, jumped as high as 1.93% Friday.

Data are expected to show inflationary pressures in the US continuing to heat up at the start of the year, likely putting a Federal Reserve interest-rate increase next month on autopilot.

The Consumer Price Index jumped 7.3% in January from a year ago, the largest annual advance since early 1982, according to the survey. Excluding volatile energy and food categories, the CPI is projected to have risen 5.9%.

The inflation data follows the government’s latest employment report, which shows newfound momentum in the labour market and faster wage growth that spurred bets that the Fed will be more aggressive in raising rates.