Large-Caps Outperform Small-Caps as Inflation Runs Rampant
Friday's headline CPI release indicates that US inflation is rising at its fastest pace since 1982. Month on month showed a rise 0f 0.8% and a 6.8% increase on an annual basis. Core CPI, which strips the series of volatile items, came in at 0.5% m/m and 4.9% y/y. The core increase is the steepest since 1991. Despite the high reading, large-cap US indexes gained on Friday and the week. However, the small-cap Russell 2000 index (US2000) declined on the day.
Quadrant 1 shows the DJI (US30) and quadrant 2 the SPX500. Both of these indexes show relative strength and have moved into the area of strength, between the upper blue and upper red bands. Quadrant 3 shows the NAS100. It is in the neutral area, between the two blue bands, and is lagging quadrants 1 and 2. Quadrant 4 shows the Russell 2000 (US2000), which ended the week in the weak area, between the lower blue and lower red bands. Consequently, the small-cap US2000 index is showing relative weakness.
Past Performance: Past Performance is not an indicator of future results.
Interestingly, the US10Y pulled back on Friday, even after such strong inflation readings. This may be one of the reasons that stocks appreciated. However, Wednesday sees the release of the much-anticipated Fed Statement and dot plots. These are likely to indicate a faster pace of tapering and a more hawkish interest rate environment to slow inflation. If so, this may prove to be a headwind for the stock market as valuation metrics adjust. In this regard, the US10Y has moved out of its area of weakness, between the lower blue and red bands.
Past Performance: Past Performance is not an indicator of future results.
Featured Image by Ahmad Ardity from Pixabay
Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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