The second week of 2024 was pretty quiet for the markets with large-cap and mid-cap stocks seeing gains and the S&P 500 ending in positive territory year-to-date, despite inflation data coming in a little hotter than expected and a soft start to corporate earnings season. For the week, the S&P 500 was up 1.87%, the Dow Jones Industrial Average was up 0.35%, and the NASDAQ gained 3.09%. The S&P Mid-cap Index gained 0.60% Meanwhile, the Russell 2000 small-cap index was even for the week.

Markets didn’t seem to have a strong reaction to geopolitical tensions increasing as multi-national forces, including the US and UK, carried out air strikes against Houthi rebels in Yemen following increased attacks on commercial ships early in the week. Several of the world’s major tanker companies halted traffic Friday for “several days” according to the International Association of Independent Tanker Owners. A prolonged disruption could result in higher energy prices, which threatens the gradual decline in inflation that supported markets in 2023.

The CPI rose 0.3% in December and 3.4% for 2023. Both readings were slightly higher than expected, but a big improvement from the previous two years. Core CPI, excluding food and energy prices, rose 0.3% as well and increased 3.9% for the year. While CPI seems to be making small, slow steps down toward the 2% Fed target, it has diverged from the Fed’s preferred inflation gauge, the PCE index (Personal Consumption Expenditures), which is decreasing at a faster pace. PCE is expected to have increased 2.7% overall in 2023 when December results are reported next week. This week, New York Fed President John Williams said, “we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis.” Basically, while inflation is improving, its slow pace may not be enough for the Fed to start lowering rates in the first quarter of this year.

Initial jobless claims fell to 202K, which was 3K less than expected. Also, Continuing claims came in at 1,834k, which was 43K lower than expected. A strong job market is a good indicator of low risk of recession.

While inflation is moderating and the labor market continues to hum along, recent trends in consumer debt bear monitoring. U.S. consumer debt soared in November 2023 by $23.75 billion. The increase blew away the expected increase of $9B and sent outstanding credit balances over the $5 trillion mark for the first time ever, according to the Fed’s latest Consumer Credit report. However, the numbers don’t show how the credit is being used or whether the outstanding balances are being paid off before interest start to accrue. Non-revolving credit, which was on an uninterrupted upward trend, even during the pandemic, went sharply lower as student loan payments came in in August. The decline is important as it gives households more room to handle credit card debt (revolving credit) if non-revolving credit (auto and student loans) is lower. According to Ted Rossman, Bankrate senior industry analyst, credit card usage and Buy Now, Pay Later usage seemingly surged during the holidays, on top of already hefty debt loads. Now, delinquencies are at their highest level since 2012.

In the week ahead, corporate earnings season will begin to ramp up following last week's reports headlined by several large banks. Their earnings results and comments from management suggest that credit markets generally remain on stable footing, though there was some focus on the modest uptick in credit card delinquencies and further softening of the commercial real estate market.