U.S. equity markets took a breather from their recent rally as the S&P 500 broke its six-week stretch of consecutive gains in response to hotter-than-expected inflation readings that pushed rate cut expectations further down the road. For the week, the S&P 500 fell 0.4% and the Nasdaq Composite dropped 1.3%, while the Dow Jones was flat. High-growth tech stocks were under the most pressure as the hot inflation readings sent interest rates higher with the 10-year Treasury ending the week at 4.29% after touching as low as 3.85% at the start of the month.

Market participants continue to dial back some of the rate cut enthusiasm from late last year as recent labor market and inflation readings suggest that it’s too early for the Fed to confidently declare victory on inflation and ease its restrictive policy stance. Last week’s consumer and producer inflation reports for January both came in above expectations as core CPI (ex-food & energy) came in at 3.9% year-over-year and core PPI was 2.0% year-over-year compared to consensus economist forecasts of 3.7% and 1.8%, respectively. The primary culprit for the upside surprise to consumer prices was shelter costs, but other important service components trended higher as well including insurance, airfares, and health care. The Fed’s preferred inflation gauge, PCE (Personal Consumption Expenditures), will be updated at the end of the month, but for now markets don’t reflect rate cuts beginning until the May or June Fed meetings and only 3 to 4 rate cuts in total for 2024 compared to peak expectations for as many as 7 rate cuts as of early January.

While the January jobs and inflation data will likely keep the Fed on hold at their next meeting in March, other recent economic data point to cooling, albeit still healthy, growth to kick-off 2024. Retail sales and industrial production both dipped unexpectedly in January though a lot of the weakness has been chalked up to poor weather conditions. Retail sales fell 0.6% last month and industrial production slipped lower by 0.1%. Despite the weak reports, the Atlanta Federal Reserve’s real-time GDP indicator, GDPNow, still has first quarter real growth tracking toward 2.9%, which would be down just slightly from the fourth quarter’s 3.3% growth rate. A cooling yet stable economic environment would be a welcomed result for financial markets as the U.S. seeks to navigate a tricky soft landing.

As fourth quarter corporate earnings season starts to wind down, some of the major themes emerging from earnings call commentary have been discussions on operational efficiency and, unsurprisingly, rising mentions of artificial intelligence. In response to declining pricing power as inflation cools off from 2021 and 2022 levels, more corporations are tightening their belts with restructurings and layoffs to preserve profit margins. Job cut announcements picked up notably in January, particularly in the tech and financial sectors, according to the Challenger report, though the number and magnitude of the announcements are down from a year ago and broader employment statistics have yet to register a material uptick in jobless claims. Meanwhile, Goldman Sachs reported that AI mentions have posted a new high in the fourth quarter as 36% of S&P 500 companies have discussed AI in their earnings calls compared to 31% in the third quarter.

The week ahead will be an important one for gauging demand for the AI infrastructure boom as chip designer Nvidia is set to report quarterly earnings. Additionally, several large retailers including Home Depot and Walmart are also on the docket to report earnings, which will help give further insight to consumer spending trends.