Stocks fall as weak data spark slowdown concerns

The decision triggered a rally in Japanese and global bonds and some weakness in the yen against the dollar.

U.S. 10-year Treasury yields dropped below 3.5 percent at 3.38 percent, also weighed down by more evidence of disinflation, with producer prices falling more than expected.

Elsewhere, similar to equity markets, WTI oil opened higher, supported by expectations of a China-driven increase in demand as the country reopens, but ended the day lower, at $79.

U.S. producer prices released today dropped in December by 0.5 percent, the most since April 2020, and up 6.2 percent from a year earlier (a slowdown from 7.4 percent).

Lower energy and food prices drove the monthly decline.

But also excluding these volatile categories, core prices rose 0.1 percent in December, the smallest increase since November 2020, and 5.5 percent from a year earlier.

Paired with last week’s further deceleration in consumer prices and the signal from leading indicators, all suggest that a pattern of disinflation is emerging, which is good news for consumers and central banks, Edward Jones analysts said.

But there are also signs that economic growth is slowing, as the Federal Reserve’s rate hikes are filtering through the economy.

Retail sales for December declined 1.1 percent from the prior month, a sharper decline than expected, while November sales were revised lower.

Vehicle, household furnishings and appliance sales all declined, a sign that higher interest rates are weighing on spending on big-ticket items.

The silver lining is that with both inflation and growth downshifting, the Fed will likely conclude its tightening campaign and pivot to a pause.

The earnings season is now in full swing with about 20 percent of the S&P 500 companies reporting over the next seven days.

With economic activity likely softening in the months ahead, corporate earnings could come under pressure and be an instigator of volatility.

But potentially supporting sentiment, the bar has been lowered as earnings expectations for the fourth quarter have been declining meaningfully over the past two months.

Analysts now expect earnings for the S&P 500 to have declined 4 percent from a year ago, the first contraction since the third quarter of 2020.

In addition to earnings, all eyes will be on the next Fed meeting on Feb. 1.

The recent data support, according to analysts, another downshift in the pace of rate hikes to 0.25 percent.

One additional and final hike potentially in March would bring the fed funds rate to about 5 percent, matching market expectations and Federal Reserve projections, at which point analysts think the Fed can pause to evaluate conditions.

Amid less aggressive Fed policy, slowing economic activity, and disinflation, the backdrop for fixed income has improved.

Analysts see an opportunity to complement CDs or other short-term bonds with longer-term high-quality bonds.

Equities could stay volatile in the near term but analysts think investors can start preparing for a more sustainable rebound in the second half of the year by diversifying into cyclical sectors and the quality parts of tech.