Wentz Weekly: Hotter Inflation, No Reciprocal Tariffs, Yet

Wentz Weekly Insights
Hotter Inflation,
No Reciprocal Tariffs, Yet

Stocks had a positive week, although the equally weighted S&P 500 underperformed the cap weighted index by over 1%, with the S&P 500 index gaining 1.47% for the week. The cap weighted index fared better due to the two largest companies, Apple and Nvidia, gaining 7.5% and 6.9% respectively. It was a solid week for tech overall, with semiconductors and AI related names performing the best. The Nasdaq led all indices higher with a 2.58% gain.

Nothing that has been thrown at the market seems to be slowing it down. Through the first six weeks of the year, we have seen a big worry in the AI space with DeepSeek, global economic concerns with the Trump tariffs, and inflationary concerns after several hotter than expected inflation reports. Although each of these resulted in a quick decline in stocks, they quickly bounced back and keep pushing record highs.

Federal Reserve Chairman Jerome Powell sat in front of Congress for his two-day semiannual testimony on monetary policy. He was asked many questions on inflation and the potential impacts from tariffs, but as has been the case refused to speculate on what the impact would be, rather saying it is too soon to consider the impacts.

Wednesday morning the latest inflation report was released that showed a 0.5% increase in the consumer prices index, the highest monthly increase since June 2022. The annual change was 3.0%, accelerating from 2.9% from December. The index that measures inflation in the services sector, something Powell has said was the Fed’s focus when rates were rising but the Fed or anyone no longer talks about now, is the highest and also the stickiest area of inflation. This index was up another 0.5% in January and is up 3.9% over the past year, double the Fed’s goal.

In the second day of testimony, Powell stated this report is evidence the Fed has more work to do on inflation. He said the Fed does not need to be in a hurry to reduce interest rates further since the policy stance is significantly less restrictive than it was a few months ago. He added Fed officials have raised their estimate of the neutral interest rate (the rate which neither supports or hinders economic growth). It seems at this point the Fed could have foregone the cuts it implemented last year. Traders are now pricing just one rate cut this year after last week’s inflation report and does not expect that until the end of the year.

But once again, the week was dominated by headlines from Trump relating to tariffs. The week started with the announcement of 25% tariffs on all steel and aluminum imports, which led to a rally in steel and aluminum stocks.

The markets were anticipating an announcement on how Trump would act on reciprocal tariffs, as that was the next focus for Trump and the administration. It wasn’t until Thursday that Trump ended up signing a memorandum that included his plans on reciprocal tariffs. The memorandum orders the U.S. Trade Representative to investigate current trade relations with countries the U.S. does trade with and propose reciprocal tariffs on a country-by-country basis. This study is to be completed no later than April 1, at which time Trump will impose the specific country tariffs.

Markets saw the lack of immediate tariffs as a relief, instead of implementing a tariff on all countries the U.S. does trade with, it delays the tariffs and could mean less impact down the road.

After a couple weeks of heavy news flow, earnings, and data, this week should be quieter. We have a few notable earnings this week, before retailers ramp up reports next week. The data calendar focuses on housing this week, and it should be quieter in the nation’s capital with the House on recess, but there are new reports the Senate is preparing to release its own budget/tax cut proposal soon.

Week in Review:
Stocks had a positive week, although the cap weighted S&P 500 index performed about 1.0% better than the equally weighted S&P 500 index. The four major U.S. stock indices finished as follows: Nasdaq +2.58%, S&P 500 +1.47%, Dow +0.55%, and Russell 2000 +0.01%. The fixed income markets saw less action, with bond yields down only slightly – the 2-year Treasury yield fell 3 basis points to 4.27% while the 10-year yield fell 2 basis points to 4.48%. After a nearly 10% move higher since September, the dollar index has fallen the past couple weeks, declining another 1.23% last week. Gold rose 0.57% to another new record high, while Bitcoin remained in a narrow range rising 1.02% for the week. Oil fell 0.37% and continues to focus on Russia/Ukraine agreement which traders speculate will lead to the removal of some Russian sanctions.

Recent Economic Data

• Consumer Price Index: According to the consumer price index, and other inflation related measures, inflation has consistently accelerated since last summer. The index increased 0.5% in January for the highest monthly increase since June 2022, and was above the 0.3% increase expected. Price increases were pretty broad based. Two of the more volatile segments, food and energy prices, increased 0.4% and 1.1% respectively. On a 12-month basis, consumer prices are up 3.0%, up from the 2.9% pace last month. Excluding food and energy prices, the core index rose 0.4%, double the expectations, while increasing 3.3% from a year ago, much above the 3.1% expected. Shelter prices, by far the largest category of the index, increased 0.4% and are up 4.4% over the past year. New vehicle prices were unchanged, used vehicles rose 2.2%, vehicle insurance rose 2.0%, while airline fares rose 1.2% (and up 7.1% over the past year). Meanwhile, the index on services prices excluding shelter, an area where inflation has been the most sticky but no one talks about anymore, increased another 0.5% in January and still up 3.9% over the past year.
• Producer Price Index: Producer prices, similar to consumer prices, increased at a faster pace than was expected in January. The producer price index increased 0.4% in the month, and comes after an upward revised December (from 0.2% to 0.5% increase). The food index rose 1.7%, energy rose 1.7%, both driving a majority of the increase, while the core index (excludes these two categories) rose 0.1%. Over the past year the index is up 3.5%, matching December’s increase. On the services side, producer price rose 0.3% driven by a 0.6% increase in transportation/warehousing costs. Core prices are up 3.4% from a year ago.
• Retail Sales: Monthly retail sales for January had a sizeable pullback in January after a strong end to 2024. Retail sales declined 0.9% in January, a bigger drop than the 0.1% decline expected, and compared to an average 0.7% monthly increase the final four month of 2024. A large bit of the decline was due to vehicle sales falling 2.8%, but retail sales excluding autos still fell 0.4%. Of the 13 major retail categories, only four of them saw an increase in the month – led by gasoline and bars/restaurants increasing 0.9% followed by general merchandise and miscellaneous stores. The biggest declines were seen in sporting goods stores, vehicle sales, and online sales. Retail sales are still up 4.2% from a year ago with real retail sales, which accounts for inflation, up just 1.2%. One of the brightest spots in the economy, consumer spending, saw weakness to start the year, which could be weather related as well due to the cold spell that hit the country, but something to keep an eye on going forward.
• Jobless Claims: The number of unemployment claims the week ended February 8 was 213,000, a decrease of 7,000 from the prior week with the four-week average relatively unchanged at 216,000. The number of continuing claims declined 36,000 to 1.850 million and has remained in the 1.800 million range for months now, with the four-week average unchanged at 1.871 million.
• Industrial Production: Industrial production increased 0.5% in January, a little higher than the 0.3% increase expected and comes after a 1.0% increase in December. The increase was driven by utilities that increased 7.2%, most likely due to the cold weather in the month, offset by a 1.2% decline in mining and 0.1% decline in manufacturing. Capacity utilization stepped up to 77.8% from 77.5%, but still around 2% below its long-run average.
• Mortgage Rates: The average prime 30-year mortgage rate fell two basis points last week to 6.87%, the fourth straight weekly decline, but only down from 7.04% over that period

Company News

• Apple: The Information reported Apple is working with Alibaba to bring its artificial intelligence features to the iPhone in China. It added the two companies have submitted its AI features to China regulators for approval and added the timing of the launch is not clear. A later report by Bloomberg said Apple has several teams in China working on adapting its AI Apple Intelligence, dealing with regulatory hurdles as well, but intends to launch the AI features in China as early as May.
• Apple: Tim Cook, Apple CEO, posted on X with a teaser saying “get ready to meet the newest member of the family” on February 19, most likely the date Apple will reveal the newest iPhone SE. The iPhone SE is a cheaper version of the iPhones and this version is expected to be the first phone with Apple’s in-house modem, moving away from Qualcomm’s components.
• OpenAI: The WSJ reported a group led by Elon Musk made an unsolicited bid for the non-profit entity that controls OpenAI worth $97.4 billion, with Musk saying it is time OpenAI returns to the “open-source, safety-focused force for good it once was.” Its CEO Sam Altman responded by saying “no thank you, but we will buy twitter for $9.74 billion if you want.” OpenAI’s most recent funding round in October valued the company at $157 billion but Softbank is discussing an investment in OpenAI that would value it at $260 billion. It was later reported by Reuters that Musk intends to withdraw his offer if the company halts its plans to move forward as a for-profit entity. A later report by the Financial Times said OpenAI is considering granting special voting rights to non-profit board to preserve control and fend of potential bidders.
• JP Morgan: JP Morgan COO, at the Bank of America Financial Services Conference gave an upbeat tone on the M&A markets, saying that M&A pipelines are healthy and deal flow has continued, while saying it expects to see investment banking fees up mid-teens for this current quarter, expecting M&A to “be a tailwind for us.”
• Chevron: Chevron said it is planning to cut 15%-20% of its global workforce beginning this year with most job cuts coming in 2026, part of its plans to cut costs by $2-$3 billion by the end of 2026. A 15-20% reduction in its workforce equates to about 6,000-8,000 jobs.
• Defense Sector: Defense stocks took a turn lower on Friday after President Trump said the country could significantly cut defense spending. When talking about China and Russia, he said there is “no reason for us to be spending almost $1 trillion on the military,” adding “when things settle down… I want to say lets cut our military budget in half” when referring to the U.S., China, and Russia.
• GameStop: Shares of GameStop shot higher last week after a report said the company is considering investing in alternative asset classes, bitcoin and other cryptocurrencies in particular, citing people familiar with the matter. The company is still in the process of figuring out what makes most sense for its business and could not decide to follow through on the investments

Other News:

• Tariffs: Tariff action by President Trump is very fluid and could change at any moment, here are some headlines over the past week:
  • Trump signed an order to impose 25% tariffs on all steel and aluminum imports while cancelling all exemptions and duty-free quotas for major suppliers from Canada and Mexico. Steel stocks moved higher as a result.
  • Trump signed a memorandum on his plan for reciprocal tariffs, which orders the U.S. Trade Representative and Commerce Secretary to propose new reciprocal tariffs on a country-by-country basis in a push to realign trade relations. The studies are expected to be completed by April 1 at which time Trump could impose new tariffs immediately, a relief to markets which were expected Trump to act sooner and may be seen as his openness for negotiations.
• The End to Pennies: President Trump said he ordered the Treasury Secretary to stop minting new pennies because the cost to mint the pennies is more than what they are worth. The Department of Government Efficiency said the penny costs over 3 cents to make (the US Mint said in its 2024 annual report it costs 3.7 cents to produce and distribute, up 20% from the previous year) and cost taxpayers $179 million in the 2023 fiscal year. In addition, pennies are less economically efficient, wasting time during transactions and are not universally accepted everywhere such as parking meters and vending machines, among others places.
• Trump/Putin Call: Trump held a phone call with Putin where both sides agreed to start negotiations “immediately” to end the Ukraine/Russian war and agreed to visit each other’s countries. Russian news media said Trump and Putin agreed to an in-person meeting to discuss areas of mutual interest, with other reports saying the meeting could take place in Saudi Arabia. European countries are advocating for a seat at the negotiating table.
• CHIPS Act: Trump is considering changes to terms of the CHIPS Act, which provides $39 billion in grants, billions in loans, and 25% tax credits, looking to renegotiate awards and has indicated delays to some upcoming disbursements, as reported by Reuters. One recipient of an award under the CHIPS Act said they are still proceeding as originally planned but have been told by the program’s office that certain conditions that don’t align with Trump’s executive orders are now under review.
• Make America Healthy Again: RFK Jr was confirmed by the Senate last week to be the next Secretary of Health and Human Services. White House press secretary said when he assumes the position, Trump will sign an executive order to establish a “Make America Healthy Again” commission that will focus on reducing chronic diseases, pushing healthier eating, and improving food safety.
• GOP Budget Bill: A draft budget bill by House Republicans proposed raising the Federal debt limit by $4 trillion and a minimum of $1.5 trillion in spending cuts over a decade while including some of Trump’s policies like reducing spending, expanding energy production, lowering taxes, deregulation, and eliminating barriers to work.
• Chairman Powell Testimony: Fed Chairman Powell said in his testimony to Congress the Fed does not need to be in a hurry to reduce interest rates further since the policy stance is significantly less restrictive than it was a few months ago, and said it is still too early to consider the impacts and the Fed will remain data dependent but noted it could put upward pressure on inflation. He said officials have raised their estimates of the neutral interest rate, and quantitative tightening still has a ways to go

WFG News

Tax Documents

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