Major U.S. stock indexes finished in a mixed yet mostly positive fashion last week as pressure on the banking sector gained steam.
Encouragingly, monthly consumer inflation declined, though the Silicon Valley Bank and Signature Bank stories dominated the headlines.
Tallying last week, the S&P 500 added 1.43%, the Nasdaq 100 gained 5.83%, and the Dow Jones Industrial Average was nearly flat, decreasing by 0.15%.
Bank Stress
After the fall of two U.S. banks, Silicon Valley Bank (SVB) and Signature Bank, First Republic Bank began to show signs of stress last week, and 11 banks pledged $30 billion in deposits to save the institution. The First Republic Bank story is still developing.
Is what’s happening with SVB and Signature a government bailout? That remains open to interpretation.
President Biden has said that taxpayers won’t foot the bill. However, the U.S. government is covering depositors beyond the FDIC limits at SVB and Signature, saving tech companies and startups with deposit balances beyond $250,000. At this time, it is being called a non-tax-payer funded bailout.
Where will the money come from then? More details should develop this week.
Big Tech Rally
A couple of bank failures and large-cap tech rallied in a big way. What gives? Hey, things don’t always make sense at face value! But there is always logic at some level. Large-cap tech investors love the fact that profitable tech giants like Apple hold large reserves of cash and have somewhat limited exposure to the financial sector.
But the core of the strength in large-cap tech last week had to be dramatic expectational shifts in the future interest rate path of the Fed.
Looking beyond this week’s March Fed meeting, future meetings could result in a halt to rate hikes or perhaps even result in rate cuts, according to some analysts. It is too early to know with any level of certainty at this time. But the market sure loved large-cap tech last week.
Inflation Deceleration
With banks at the forefront of the market’s mind last week, the usual top-priority Consumer Price Index (CPI) data was overshadowed. The latest data for February showed inflation falling to an increase of 6.0% year over year, in line with market expectations.
The 6.0% rise was the lowest annual increase since September 2021 and marked the eight strength month of declines.
On a monthly basis, consumer prices advanced 0.4%, following a 0.5% rise in January. Core inflation, which excludes food and energy, rose by 0.5% month-over-month in February and was 5.5% higher on a year-over-year basis.
Government Bonds Rally, Yields Sink
Flight to safety sent investors to bonds last week. Bond yields, especially on the short end of the yield curve, sunk lower; the 2-year yield posted historic declines amid an investor flight to safety bid and anticipation of a potential shift in the Fed rate hike narrative.
The 10-year yield finished at 3.396% last week, closing the week some 8.12% lower than the previous week’s close of 3.696%. A big move.
Fed Meeting This Week
It is finally time for the highly anticipated March Fed meeting this week. The interest rate decision on Wednesday has to be the most highly anticipated Fed meeting in recent history.
There is a split crowd among market participants. Some are calling for no hike based on stress in the banking sector and lower inflation data. Others argue that rate hikes must continue to ensure inflation and stagflation are tamed, even with the rising stress for U.S. banks.
It feels like the Fed is in a proverbial pickle.
Rate Hike Probabilities
We often cite the CME FedWatch tool when discussing interest rate probabilities. The accuracy has been high historically, but there has been volatility in the Fed Funds futures contracts that provide these probabilities.
At the close of last week, the CME FedWatch tool favored a 25 basis point hike (62% chance), and the zero-rate hike probability showed a 38% chance.
The data is dynamic and will likely change multiple times before the Fed meeting.
ECB Raises Rates
Ahead of this week’s U.S. Fed meeting, the European Central Bank (ECB) raised rates by 50 basis points last week despite the recent financial turmoil.
The rate hike takes the ECB’s benchmark rate from 2.5% to 3.0%. Will the U.S. Fed remain aggressive too?
Weekend Developments and Test of Resolve
Reminiscent of 2008, weekend banking activities are alive and well again, with news breaking that UBS will buy Credit Suisse.
Speaking of news, the steady drumbeat of headlines over the past week has rattled investors, and rightly so. But as long-term investors, it’s important to keep in mind that financial markets have cycles: expansions, contractions, booms, and inevitable busts.
The Fed’s rapid rate hike path to battle inflation has produced some casualties, but industry-specific risks are one of the critical reasons a diversified portfolio stands the test of time.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Last week was a wild and rocky one on Wall Street. Bank run drama in Silicon Valley, jobs growth (again!), and a persistently hawkish Fed all contributed to the headlines. There was no shortage of fireworks, and major U.S. equity indexes markets fell sharply. In fact, the S&P 500 fell to levels not seen since January.
Tallying last week, the S&P 500 declined by 4.55%, the Nasdaq 100 fell by 3.75%, and the Dow Jones Industrial Average decreased by 4.44%.
A Note of Caution
Given the enormity of the Silicon Valley Bank collapse, I believe it’s important to share related insights and context in this email. But I do want to note that this situation is constantly evolving, so keep in mind that there may be some new developments I’m not covering in this email.
I encourage you to read more about minute-to-minute developments in news sources like CNBC, The Wall Street Journal, and The New York Times.
Market Silicon Valley Bank
Venture capitalists and tech startups felt pain last week as Silicon Valley Bank became insolvent, sparked by the company’s need for liquidity, which resulted in an old-fashioned bank run.
The majority of the forty-year-old institution’s clients are venture capitalists and tech startups. The California Department of Financial Protection and Innovation (DFPI) took possession of the bank last week and appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver.
SVB and the ensuing fallout is an ongoing story. The latest information shows that the U.S. government has indeed stepped in and will backstop depositors and financial institutions associated with Silicon Valley Bank. This occurrence is reminiscent of the Too Big to Fail phenomenon from 2008.
SVB Market Effects
There were, of course, chain reactions. For example, on Saturday, Etsy sent messages to sellers informing them that their payouts were delayed. Notable companies that have exposure to SVB include Roku, Etsy, Roblox, and Vimeo.
CNBC’s Jim Cramer is calling the bank’s collapse extremely deflationary. However, understand that not even a month ago, Cramer suggested SVB as a buy on CNBC. Yikes.
Rate Policy Impact?
For a glass-half-full perspective on SVB, the odds of a 50-basis-point increase at the March meeting fell precipitously last Thursday, reverting to a higher probability of a 25-basis-point hike.
Per the CME FedWatch tool, the odds further shifted as of Monday, with probabilities showing a 76.8% probability of a 25-basis-point hike, a 23.2% chance of no rate hike, and a 0% chance of a 50-basis-point hike at the March 22nd meeting. The data is dynamic and is accurate as of the last check.
Investor Protection
For banking products, FDIC provides protections up to certain limits. Many of SVB’s clients were large tech companies that most likely exceeded the limits, but the latest news does indicate that the U.S. government will come to the rescue.
It is a good time to mention that while FDIC covers banking products, it is SIPC that protects investors of securities held at clearing firms.
Government Bond Yields Drop
Holy flight to safety. Investors flocked to treasuries at a frenzied pace last week, sending treasury yields lower across the curve.
Ten-year note yields dropped sharply last week, closing the week at 3.696%, down from their previous weekly close of 3.963%.
This sharp drop in yield translates to the mood of the market last week, which was informed by SVB events that rushed investors into safe-haven plays like treasuries and the fact that the Fed may have to rethink sharp rate hikes and/or the “higher for longer” narrative.
Folks are now chomping at the bit to see how the narrative plays out this week regarding the handling of SVB and any Fed/government involvement. We also get Consumer Price Index (CPI) data Tuesday.
Jobs Growth (Again!)
Federal Reserve Chair Jerome Powell has broadcasted that the Fed’s rate hike policy will be data-dependent. Nonfarm payrolls for February came in above expectations again, showing 311,000 jobs created versus 225,000 expected. Rising interest rates are intended to cool job demand, yet employers continue to add workers at a rapid pace.
Measuring market reaction to the employment data released last Friday was challenging, as all eyes and ears were on SVB. The employment data would ordinarily translate to an increased likelihood for a “higher for longer” interest rate narrative. But given the events of last week, the Fed may have to take a step back to reconsider the aggressive stance on rate hikes.
Market participants will eagerly await clarity this week from the Fed.
Times Like These
As you may have seen, federal regulators also took over Signature Bank of New York over the weekend. President Joe Biden said Monday morning that the SVB and Signature Bank bailouts would not be footed by taxpayers.
While the headlines may seem concerning, we have been here before. Lehman and Bear Stearns happened in 2008, and long-term investors reaped the rewards of holding through turbulent times.
Let’s remind ourselves of that and remain disciplined on our long-term journey. For some investors, dollar-cost averaging may make sense in the coming days and weeks. For others, simply remaining disciplined and sticking to the plan may be the answer.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
After a strong January, major U.S. equity indexes experienced declines in February as government bond yields rose. Economic data remained strong throughout the month, including job and inflation metrics, leading the market to expect further interest rate hikes by the Federal Reserve.
For the month of February, the S&P 500 ($SPX) declined by 2.6%, the NASDAQ Composite ticked down 1.11%, and the Dow Jones Industrial Average ($DJI) shed 4.2%.
Fed Signals
Starting out last month, the Fed raised rates by 25 basis points at its February 1st meeting. Market participants widely expected the 25-basis-point hike.
The statement released with the rate hike had somewhat of a dovish tone but with a bit of mixed messaging. The Fed acknowledged that inflation has eased somewhat, which was welcome news. However, Federal Reserve Chair Jerome Powell said, “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”
U.S. equity markets initially moved higher on the Fed’s acknowledgment that inflation has eased somewhat. But after digesting the full message—which noted “data-dependency” for the future direction of policy and having “a long way to go”—markets turned negative on the day and kept the negative tone throughout the rest of the month.
Hot Jobs Number
After Powell reiterated that policy would heavily depend on economic data, attention quickly turned to the upcoming non-farm payrolls data. The jobs number came in super hot, showing 517,000 jobs created versus 183,000 expected.
Markets reacted to the downside on the data release, although in an orderly and muted fashion.
Inflation Ran Hot Again
Following Fed commentary on “data dependency” and several strong economic data releases, all eyes were on the next release: the January Consumer Price Index.
On Valentine’s Day, the Fed’s sweet treat showed consumer pricing running hotter than expected at a 6.4% year-over-year rise versus estimates for 6.2%. On a month-over-month basis, data showed a 0.5% increase in consumer pricing vs. the 0.4% expected.
The usual suspects were the culprits for the rise; necessities like shelter (including rent), energy, and food all saw prices climb in January.
The mid-month data further strengthened the conviction that more rate hikes would be on the table. The result was softening equity index pricing and higher government bond yields throughout February.
China Reopening
Data from China showed that factories had their best month in nearly 11 years after reopening from its zero-covid policy.
China’s Purchasing Managers’ Index for the manufacturing industry hit 52.6 in February, its highest level since April 2012, according to data released Wednesday by the National Bureau of Statistics.
This followed the January reading of 50.1, which was a sharp increase from the month before and came as disruptions caused by the abrupt end of pandemic restrictions faded. China scrapped most of its restrictions in early December.
Signs of global growth are encouraging for the economy here at home.
Q4 Earnings
Earnings season for the fourth quarter is winding down, and here is a quick synopsis: For the 489 S&P 500 companies that have reported Q4 results as of the time of writing, total earnings are down -5.8% from the same period last year with +5.8% higher revenues. 70.8% beat earnings per share (EPS) estimates and 70.3% beat revenue estimates, according to data from Zacks.
There are more Q4 earnings nuggets from Factset here.
Overview and Outlook
February featured a sentiment shift from the rising equity indexes in January. Data from China provides a positive element of support for the broader equity market picture, but the U.S. Fed’s focus on bringing inflation back to its target rate remains the front-and-center narrative.
Eventually, the driving force of U.S. equities will revert to earnings and sales growth, as well as positive analyst revisions and strong forward-looking guidance. So, amid this inflation-driven period, it is vital to remain focused on these time-tested data points.
With that said, market attention now turns to the March Fed meeting, where another hike is expected. As of March 6, expectations favor another 25-basis-point hike in March (69.4% probability) and a 50-basis-point hike showing a 30.6% probability, according to data from the CME FedWatch Tool.
The current landscape could provide opportunities for investors seeking to benefit from dollar cost averaging.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
After starting 2023 with a boom in January, major U.S. stock indexes fell last week, marking the third straight week of declines for the S&P 500.
Summarizing last week’s U.S. equity market index activity, the large-cap S&P 500 shed 2.67%, the Nasdaq 100 decreased by 3.14%, and the Dow Jones Industrial Average dropped by 2.99%.
Inflation Acceleration?
Factoring into the equity market declines last week was the Federal Reserve’s inflation gauge of choice: core personal consumption expenditures. Last week’s reading, representing the month of January, showed a monthly rise of 0.6% and a yearly uptick of 4.7% versus expectations for 0.5% and 4.4%, respectively.
The higher-than-expected Core PCE data should keep the Fed on alert and could contribute to a ” higher rates for longer” narrative.
U.S. Government Bond Yields Rise
U.S. 10-year note yields settled higher last week, finishing the holiday-shortened trading week near 15-week highs.
Friday’s 10-year note yield settlement was 3.948%, up from its 3.827% settlement the previous week.
Rate hike uncertainty and renewed inflationary concerns contributed to the rally in yields. For those keeping score at home, the 2-year/10-year Treasury yield curve remains inverted.
Big Retailers Offer Cautious Outlooks
It was a tough week for the retail sector. In fact, it was the worst one since July 2022, as both Walmart and Home Depot issued cautious guidance.
Walmart topped consensus estimates for the fourth quarter but issued a cautious sales outlook for 2023.
Walmart’s Chief Financial Officer John David Rainey said, “Our value proposition is certainly resonating with consumers right now, but there’s a lot of macroeconomic uncertainty. We’re adopting a cautious outlook, and we want to make sure we’re responsive to whatever environment we’re going to find ourselves in.”
Home Depot struck a similar tone albeit with less positive results, as the retailer’s Q4 revenue missed analyst expectations for the first time since 2019.
The home improvement retailer saw outsized growth over the last couple of years, boosted by the pandemic home improvement boom. The current macroeconomic backdrop seems to be impacting sales, however.
Home Depot FCO Richard McPhail said, “So we work from kind of a fundamental assumption that consumer spending will be flat. We know that our market has seen a gradual shift that reflects the broader shift in the economy, in consumer spending from goods to services.”
Q4 GDP Revised
Fourth quarter gross domestic product (GDP) data was revised lower last week, with revised data showing a 2.7% year-over-year gain versus the 2.9% initial estimate.
The GDP revision was linked to a downward revision in consumer spending, while the Federal Reserve’s key inflation metrics were revised higher.
Between the GDP revision, CPI, and Core PCE, the cumulative data contributes to a backdrop that favors more interest rate hikes.
Quiet Economic Calendar
The economic calendar is a quiet one this week. The environment could be a good backdrop for the markets to catch their breath after factoring in more rate hikes at future Fed meetings.
Consumer confidence, ISM Manufacturing Purchasing Managers’ Index, and ISM Services Purchasing Managers’ Index are the major economic data points for release this week.
Present Theme
The Fed has broadcasted several clues over the last month that its rate hike crusade may not be over. Now, the Fed has more data in the form of higher Core PCE to use as ammo for future rate hikes. Let’s remember that the Fed has communicated that their policy decisions will be “data-dependent.” Well, the most recent inflation data points have been higher than expected.
A Reminder Regarding Our Commitment
As we continue on our long-term investing journey, it’s important to stay focused on long-term goals, not short-term developments. Markets do not move up or down in a straight line.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock indexes digested hotter-than-expected Consumer Price Index (CPI) data last week and finished the week in a mixed fashion, while bond yields rose.
Overall, the S&P 500 shed 0.28%, the Nasdaq 100 increased by 0.43%, and the Dow Jones Industrial Average was essentially flat for the week—lower by 0.13%.
Hot CPI Data
Lower prices? Not so fast. CPI for January came in hotter-than-expected at a 6.4% year-over-year rise versus estimates for 6.2%. On a month-over-month basis, data showed a 0.5% increase in consumer pricing vs. the 0.4% expected.
The usual suspects were cited for the rise; necessities like shelter (including rent), energy, and food all saw prices climb in January.
Rising Bond Yields
Government bond yields rose last week, reaching three-month highs for both 2- and 10-year notes.
As major U.S. stock indexes finished mixed last week, the 10–year note yield advanced, closing the week at 3.827%. The higher-than-expected CPI data could give the Fed what it needs to continue a more hawkish and aggressive rate-hiking campaign.
FedWatch
The chances of a 50-basis-point rate hike at the March Fed meeting have been rising. On January 19th, the probability was 2.5%.
As of February 10th, and before last week’s data (including CPI and Producer Price Index), the probability of a 50-basis-point hike in March was 9.2%.
As of Friday, February 17th, data showed a probability of 18.1% for a 50-basis-point hike in March, according to the CME FedWatch Tool.
A 25-basis-point hike in March remains the most probable, at 81.9% at the close of last week.
Earnings Season
Expectations were on the low side coming into earnings season, amid the market backdrop of inflation and higher interest rates.
With earnings season nearing its end, 82% of S&P 500 companies have reported results. For Q4, the blended earnings decline for the S&P 500 is -4.7%, according to data from Factset.
68% of S&P 500 companies have reported a positive earnings per share (EPS) surprise, and 65% of S&P 500 companies have reported a positive revenue surprise.
Retail Sales Shine
Last week’s bright spot data-wise was retail sales for January, which showed an impressive monthly jump of 3% versus 1.9% Dow Jones estimates. Americans spent heavily in January, even with inflation rising and interest rates.
That might have you saying: What gives? Well, the retail sales data is not adjusted for inflation, so the massive spike above expectations may be a bit inaccurate. With that said, the 3% monthly spike in retail sales surely outpaces the 0.5% increase in inflation for January. So, let’s call it a net 2.5%% gain for our purposes.
Credit cards. Americans love to spend. Banks love to see it with these higher interest rates. Consumer credit card balances increased by $61 billion to reach $986 billion, surpassing the pre-pandemic high of $927 billion in Q4 2022, according to data from the New York Fed.
With the average credit card interest rates ranging from 16.98% – 25.08% right now, it is an opportune time to be aware of spending habits and avoid carrying balances. For many Americans, using credit cards has been the only way to continue buying necessities amid persistent inflation.
This Week
Though U.S. stock and bond markets are closed on Monday for Presidents’ Day, this shortened week includes several important events. Wednesday features Federal Open Market Committee (FOMC) meeting minutes, with quarterly gross domestic product (GDP) on Thursday and Core Personal Consumption Expenditures (PCE) Price Index on Friday.
The Core PCE Price Index should garner the most attention, being the Fed’s preferred inflation gauge. Core PCE showed a 4.4% jump year-over-year in last month’s reading, its smallest increase since October 2021. Folks will want to see if it comes in hot like CPI did last week.
The Takeaway
CPI data was above expectations for the first time since the October 2022 data release. The Fed has broadcasted previously that rate hikes will persist and be “data-dependent.” So, the attention turns to the March meeting: Will the Fed hike by 25 or 50 basis points? The Core PCE Price Index data coming this Friday should factor into the Fed’s decision-making process.
The market may also get some clues Wednesday via the FOMC meeting minutes. Folks will be listening to get the most current pulse on the Fed’s mood.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
After two consecutive weekly gains for the S&P 500, markets reversed lower in a moderate fashion last week, with a luncheon featuring Federal Reserve Chair Jerome Powell in the spotlight.
For the week, the S&P 500 declined by 1.11%, the Nasdaq 100 fell by 2.14%, and the Dow Jones Industrial Average decreased by 0.17%.
Lunch with Jerome
Last Tuesday featured hungry world leaders chowing down around noon at the Economic Club of Washington, D.C. On the docket? Fed Chair Jerome Powell.
With global financial leaders in attendance, plenty of eyes were on the event live stream, with traders analyzing each word.
To summarize, Powell mentioned that inflation is beginning to ease but that it will be a long process and that interest rates will rise further, especially if economic data releases warrant it.
Chair Powell Luncheon Quotes
“The disinflationary process, the process of getting inflation down, has begun, and it’s begun in the goods sector, which is about a quarter of our economy,” the central bank chief said. “But it has a long way to go. These are the very early stages.”
“The reality is we’re going to react to the data,” Powell said. “So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”
Bond Yield Inversion
Holy inversion. The inverted yield between 2-year and 10-year notes reached a negative spread of 76 basis points to close out last week after reaching 86 basis points last Thursday. These levels have not been seen since the early 1980s.
Ten-year note yields rose sharply last week, closing the week at 3.745%, up from their previous weekly close of 3.531%. This sharp rise shows conviction in the expectations for potentially more Fed rate hikes for longer.
Current Fed Meeting Probabilities
As of Monday morning, bond markets currently factor in a 90.8% probability of a 25-basis-point hike at the March 22nd Fed meeting and a 73.6% chance of another 25-basis-point hike at the May 3rd meeting, per the CME FedWatch tool.
U.S. Dollar Eyed
The U.S. Dollar Index rose along with bond yields last week. This marked the second consecutive week of U.S. Dollar Index gains.
Many traders and analysts will be monitoring the U.S. dollar for further strength, given the recent pullback and the release this week of Consumer Price Index (CPI) data.
Consumer Sentiment
Last Friday featured the most recent preliminary consumer sentiment reading, showing a better-than-expected result of 66.4, above estimates of 65.0.
Slightly improved consumer sentiment is always good. But it’s important to keep in mind that consumer debt is currently at an all-time high of $4.78 trillion, according to data from the Federal Reserve.
As I’m sure you well know, stuff still costs a lot!
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Last week featured a mixed tone for the U.S. stock market indexes. We saw a blowout jobs number, perhaps indicating that Federal Reserve rate hikes have not cooled the economy enough to tame inflation. Prior to that, we also got the widely expected 25-basis-point rate hike from the Fed.
For the week, the S&P 500 increased by 1.62%, the Nasdaq 100 rose by 3.34%, and the Dow Jones Industrial Average tacked on 0.15%.
Fed Rate Hike
Markets expected a Fed rate hike, and the Fed delivered. Another 0.25% rate hike is now in the books. The latest rate hike takes the benchmark interest rate to a target range of 4.5%-4.75%, the highest since October 2007.
The rate hike was no surprise. But Federal Reserve Chair Jerome Powell added a new keyword to the statement, showing that the Fed expects “ongoing” increases to the key overnight lending rate.
Ongoing. It is just a word. But when it comes to Fedspeak, it is that sort of keyword that gets market participants thinking about what the Fed may do next.
Big Jobs Number
Last Friday’s jobs report came in massively above expectations, showing 517,000 jobs created versus 183,000 expected. Wow.
At face value, giant job creation may seem bullish for the economy. In the current marketplace, however, it keeps the door open for further Fed rate hikes. Market participants will be digesting this data further this week, especially given Chair Powell’s “ongoing” keyword.
U.S. equity market indexes reacted to the downside on Friday after the data release, but in a rather muted and orderly fashion. We will see what this week holds.
Speaking of the jobs number, how about this trader making a big trade right before the jobs data on Friday? That’s the stuff dreams are made of. I bet you this trader had a pretty good weekend!
Wild Government Bond Yields
On Thursday, the 10-year yield fell below 3.35% intraday, representing the lowest yield since September 2022.
The rather large move lower in yields was short-lived and rose on Friday’s jobs number with the prospect of a more hawkish Fed and potentially more interest rate hikes on the table.
10-year yields settled at 3.531% on Friday.
Gasoline, Oil Fall
Crude oil has been falling since mid-2022. As a result, gasoline has been falling, too, with regular gas averaging the $3.470 level as of Monday morning, according to AAA. Travelers and drivers love to see it.
July crude oil futures fell hard last week by 7.89%, settling at $73.39 per barrel. After the jobs data last Friday, many other commodities also fell, and the U.S. dollar gained steam.
The Takeaway
The market gives clues, and we listen. Last week’s message is still under interpretation as of Monday morning.
The Fed warned us that rate hikes will be “ongoing.” And Friday’s massive increase in jobs leaves the door open for the Fed to continue its rate hike campaign to cool inflation, differing from the consensus before the jobs data release.
The market reaction after the jobs data was only slightly to the downside on Friday. Now, market participants will debate if the huge jobs gain means more Fed rate hikes after the March Fed meeting. Time will tell. Sentiment could shift back to a pre-January tone in the short term, but anything is possible at present.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. equity indices started the new year positively, with the Dow, Nasdaq 100, and S&P 500 all posting weekly gains. Much of last week’s strength came on Friday after the most recent employment data release.
Tallying results from last week, the S&P 500 gained 1.45%, the Nasdaq 100 added 0.92%, and the Dow Jones Industrial Average increased by 1.46%.
Strong Jobs Report
Nonfarm payrolls rose by 223,000 in December, beating the Dow Jones estimate of 200,000. The labor market continues to show strength, even with the Federal Reserve hiking rates to slow economic growth. Notable sector strength existed in the healthcare, construction, and hospitality sectors.
Wage growth, however, showed some momentum loss in the recent reading, showing average hourly earnings up 4.6% from one year ago. This was below estimates of 5.0%.
In addition, the unemployment rate fell from 3.7% to 3.5%, also better than expectations, tied for the lowest in 50 years.
Treasury Yields Fall
10-year note yields declined last week, as Friday’s jobs report showed signs of some wage growth slowdown. Investor inflation concerns seemed to decline on this data. Ultimately, 10-year note yields settled last week at 3.568%, sharply lower from the previous week’s close of 3.88%.
Shorter-term Treasury yields also fell last week.
Fed Meeting Minutes
Before Friday’s market rally on the jobs report, there was a different tone set courtesy of the Fed December meeting minutes released on Wednesday.
The meeting minutes indicated that the Fed sees higher rates for “some time” ahead. They noted: “Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy.”
The hawkish comments sent markets lower midweek prior to Friday’s rally on the jobs report.
Inflation Data on Tap
Once again, we are due for the monthly check-in on inflation via the Consumer Price Index (CPI). For the January release of December data, preliminary estimates are for a 6.5% year-over-year rise in CPI.
The last monthly reading showed a 7.1% year-over-year rise, and many market watchers think this week’s CPI could be the deciding factor between a 25-basis-point or 50-basis-point rate hike at the February Fed meeting.
As of Monday morning, the CME FedWatch Tool shows a 77.2% chance for a 25-basis-point hike and a 22.8% chance of a 50-basis-point hike.
The Takeaway
Last week was somewhat of a tug-of-war via hawkish Fed meeting minutes midweek and the healthy jobs report showing some signs of a wage growth slowdown.
The bond yield decline on the heels of solid nonfarm payroll data paints a picture of improving investor sentiment, even with the Fed minutes coming out on the hawkish side.
This week’s economic data calendar features CPI on Thursday and University of Michigan consumer sentiment data on Friday. Broader sentiment could improve if CPI comes in near or below expectations, as this could increase the chances of a 25-basis-point hike versus a 50-basis-point-hike at the next Fed meeting.
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Major U.S. stock indexes fell last week amid another decline in monthly consumer inflation and a somewhat hawkish tone at the final Federal Reserve meeting of 2022.
Overall, the S&P 500 fell by 2.09%, the Nasdaq 100 lost 2.76%, and the Dow Jones Industrial Average decreased by 1.66%.
Lower Inflation Print
Prices in the U.S. rose 7.1% year-over-year in November, marking the lowest year-over-year increase since December 2021.
Core inflation, which excludes food and energy, rose by 0.2% month-over-month, standing as the lowest monthly rise since August 2021. This data release offered an encouraging sign in the inflation battle.
Inflation Nuggets
Looking under the hood of the CPI data, the high-flying used vehicle market appeared to be pulling back in November, with a 2.4% month-over-month decline in pricing. Prices remain elevated, however, and there is little overall cost relief for consumers financing their purchases amid rising interest rates.
In addition, energy and energy service costs declined in November, while shelter and food pricing remained elevated.
Federal Reserve: 50 Basis Point Hike
As expected, the Federal Reserve raised the benchmark interest rate by 0.50% last week. No surprise there, and it was a welcome decline after four sequential 0.75% hikes.
The seventh and final rate hike of 2022 is in the books, and the U.S. benchmark lending rate currently sits at 4.25% – 4.50%, the highest rate in 15 years.
Seemingly Hawkish Fed Tone
While the Fed rate hike was at a lower increment than previous hikes in 2022, Fed officials expect to keep the overnight lending rate higher in 2023 than previously expected.
The forecasted Fed terminal rate (the highest rate of the tightening cycle) is now 5.1%, with a target range of 5.00% – 5.25%. Previous Fed estimates from September were for a terminal rate target of 4.6%.
The hawkish rhetoric (forecasting higher rates for longer) had a souring effect on equities and largely contributed to the overall market declines last week.
World Central Banks
The U.S. Fed was not alone in the global rate-hike crusade last week. Central banks across the globe, including in the United Kingdom, the European Union, and Switzerland, hiked their key lending rate by 50 basis points as well.
In a notable comment, Bank of England Governor Andrew Bailey told broadcasters that inflation will likely start falling “more rapidly” starting in the late spring of next year.
The United Kingdom’s benchmark lending rate now sits at 3.5%, as U.K. CPI dropped from a 41-year high of 11.1% to 10.7%.
Abandoned Carts
Inflation showing its second straight monthly decline did not seem to help consumer spending in November.
Retail sales for November fell 0.6% month-over-month, which is the largest decline in 11 months. The report, released last Thursday, followed the encouraging CPI data on Tuesday and the hawkish-sounding Fed on Wednesday.
It was a busy week for the markets, and the Fed commentary on higher rates as well as the softer retail sales data dwarfed the pullback in CPI as recession fears continued to weigh.
Growth vs. Value
According to data from FactSet, many analysts expect that the 2022 S&P 500 growth rate will average 5.1%, well below the average yearly earnings growth over the last ten years of 8.5%.
In the rising interest rate environment that has been 2022, value investors have enjoyed a resurgence, with October standing as one of their best months since 1978 by some metrics.
Heading into 2023, analysts will be weighing the Fed’s speed, intensity, and rhetoric when it comes to the question of growth vs. value. Higher interest rates increase the cost of borrowing and can erode companies’ future earnings and growth prospects.
The Week Ahead
The economic data calendar is a quiet one heading into the Christmas weekend. U.S. equity markets will be closed on Monday, December 26th, in observance of Christmas.
We will get the Fed’s preferred gauge of inflation via the personal consumption expenditures (PCE) metric and consumer confidence data this week. A decline in the PCE would likely be constructive for the markets, providing some confirmation of the CPI data from last week.
Home Stretch
With two weeks left in 2022, it’s an opportune time to discuss your investment objectives. For example, your goals – have they changed or do they remain the same? Have you discussed your capital gains/losses situation with your tax advisor – is tax loss harvesting appropriate for you?
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. equity indexes traded lower last week as investors interpreted wholesale pricing inflation data to end the week. Heading into this week, we will keep our eyes out for reaction to the November Consumer Price Index (CPI) data release and the December Federal Reserve meeting.
For last week, ending on December 9, the S&P 500 dropped by 3.37%, the Nasdaq 100 shed 3.59%, and the Dow Jones Industrial Average decreased by 2.77%.
Inflation Expectations
Overall, last week was a quiet one for economic data releases, but Friday did feature November’s Producer Price Index (PPI) data release, which can give clues about future CPI data. The report showed wholesale prices rising 0.3% in November month-over-month, above the Dow Jones economist estimate of 0.2%.
Core PPI, which excludes volatile food and energy, increased by 0.4% in November month-over-month versus estimates of 0.2%.
Will the hotter-than-expected producer pricing keep a 75-basis-point hike on the table? More on that in a moment.
Consumers Sentiment Improves
Surprisingly, consumer sentiment rebounded in early December, with the most recent preliminary report from the University of Michigan showing a 59.1 reading versus expectations of 56.9.
Gains in consumer sentiment were seen across multiple demographic groups, particularly in higher-income families with large stock holdings.
Mixed Signals & Treasury Yields
These recent data releases seem to have created some mixed signals for market participants. The PPI data, for example, showed its slowest gain year-over-year since May 2021, but monthly increases were above expectations.
The higher-than-expected PPI data may have caused investors to temper inflation reduction expectations for a moment and continue to assess data for new clues.
Stocks fell on the heels of this PPI data, while bond yields advanced. This rise in 10-year note yields came after four consecutive weeks of decline. Friday’s weekly close showed the benchmark 10-year note yield settling at 3.566%, up from the previous weekly settlement near 3.50%.
When the 10-year note yield moves, so do mortgage rates. The average 30-year mortgage rate is hovering at around 6.00% at the time of writing. 6.00% is a welcome sight for many would-be borrowers, as 30-year mortgage rates were near 7.00% in November.
What to Expect From the Fed
Markets are now focusing on Tuesday’s CPI data release and the December Fed meeting on Wednesday. The Federal Funds rate and the Federal Open Market Committee statement are on tap for a 2 p.m. release.
As of Monday morning, the CME FedWatch Tool shows a 77.0% chance of a 50-basis-point hike this week and an outlier chance of 23.0% of a 75-basis-point hike this week. Tuesday’s CPI data could influence the Fed’s perspective this week and may help to determine the trajectory of rate hikes in the January or March meetings.
The Takeaway
The final CPI reading and Fed meeting of 2022 are the focal points in what is shaping up to be a busy week ahead. PPI data coming in hot for the month of November has many market watchers on their heels, as a higher-than-expected CPI print could be in play.
A surprise rise in consumer sentiment helps the outlook for the holiday shopping season, but the near-term direction could be based on what CPI looks like this week as well as the Fed’s tone heading into the end of the year.