Jason's World

The bull market and the optimism for the future among investors that has defined the year so far has come to an end, at least for now.

Markets were hit by a major shock in the past week with a hotter-than-expected inflation report. The CPI for January came in at 3.1%, a drop from the previous inflation report’s 3.4% figure but still 0.2% higher than expected. Core inflation-inflation discounting food and energy, rose by 3.9%. Driving inflation were the usual culprits-shelter and cars, which saw their cost increase by 6% and 9.5% over the past year, respectively, while costs for food and energy continue to remain stable.

The producer price index, the actual prices paid to producers for their services, was also hotter than expected. After falling by 0.2% in December, the PPI rose by 0.3%, as opposed to a consensus forecast of 0.1%. 

Meanwhile, retail sales fell by 0.8%, the most since March 2023, as consumers unwind from holiday season shopping. This is a significantly worse drop than what was expected-and was also accompanied by downward adjustments in retail sales figures in previous months. This imperils the possibility of a soft landing-while one month’s data is hardly a trend, the data from the past month could raise the specter of stagflation for many investors with its signals of weak consumer spending and stubborn inflation.

Indeed, the economic outlook for this year has changed from what it was at the very beginning of the year. Fresh off a year that outperformed all expectations, perhaps people should have taken note of the old adage-“past performance isn’t indicative of future results” before making any exuberant predictions about the new year. Of course, it’s still early in the year, and things could certainly turn around-indeed there are silver linings for the economy in recent reports, namely the increase in consumer confidence, which could power solid spending going forward. But analysts are no longer as enthusiastic about this year as they once were-in fact, some models are predicting that a recession will happen this year.

Nevertheless, last week’s inflation report has shown inflation declining year-over-year. Yet, there is potential for things to get worse. In a reminder of the effects of global conflict on international trade, Houthi rebels attacked another British vessel in the Red Sea on Sunday. Though shipping rates from China to the West Coast appear to be on the decline, these attacks are disrupting international trade on many key routes, and predominantly affects Europe as of now, even a modest effect on inflation rates by these attacks would further disrupt the “soft landing” narrative that remains prevalent on most of Wall Street and cause market turmoil, as already modest projections for rate cuts are scaled back even further if inflation remains stagnant or even ticks up.

Wednesday’s earnings report by Nvidia could also rattle markets. As Nvidia blows past 700, with options betters piling into bullish options at the highest level since the 2021 meme stock craze, anything other than a significant uptick in guidance is likely to cause the market to decline, as investors who sold options to bullish options betters cover their positions and the shares associated with them, due to a decline in implied volatility crushing call option prices.

As commercial property sales resume after a devastating year for commercial real estate, another factor that was predicted to rattle the economy but has yet to come to pass is now rearing its ugly head again-the commercial real estate debt crisis. While the increase in commercial real estate deals may seem promising on paper, the truth is that declines in commercial property values from London to Tokyo to New York mean that the sale of these properties could imperil the loans that financed the initial purchase of these properties before the massive depreciations post-pandemic.