U.S. and International Equities
Markets Finish Mixed
The major market averages finished mixed, with sector action varied. This week, energy performed poorly on the back of lower oil and natural gas prices. International markets also ended the week mixed as these economies continue to perform better than expected amid global price pressures and energy supply concerns.
So far this year, the Dow Jones Industrial Average is lagging the S&P 500 by its largest margin since 1934, as the blue-chip average outperformed the S&P 500 by 11% in 2022. Investors have been shifting risk from blue-chip value names to growth sectors, like communication services, consumer discretionary and information technology, on the belief the Fed will change course on rates.
Fixed Income Tumble as Yields Increase
The Bloomberg Aggregate Bond Index finished the week lower as yields increased for the second straight week. Bonds have been directly influenced by hawkish Fed speak last week in addition to marginally higher-than-anticipated inflation print. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished the week lower yet continue to lead all bond markets in year-to-date returns.
The strong price action in emerging market debt since November continued in January, although the rally appears to be running out of steam. What started as a relief rally last year, given stabilizing terminal fed pricing, these bonds received support from better growth indicators showing China’s earlier rebound and some improvement in developed markets.
Many commodity watchers believe that oil could return to $100 a barrel this year amid China’s reopening along with better-than-expected economic reports out of Europe. However, energy prices declined this week as traders are concerned that the Federal Reserve will not pivot on monetary policy given last month’s inflation prints. The major precious metals, gold and silver, finished the week lower, following energy’s path lower given future economic growth concerns.
Economic Weekly Roundup
January Consumer Price Index
In January, the U.S. Consumer Price Index (CPI) rose 0.5% from a month ago, driven up by shelter costs. Higher shelter costs contributed roughly half of the monthly gain in prices during the month. Other contributors to the upward rise in prices were groceries, restaurants, and energy costs. For most categories, inflation is decidedly past peak. With this being said, the pathway back down to the Fed’s inflation target of 2%, will be choppy.
The annual inflation rate dipped down to 6.4% in January from 6.5% the previous month. The annual rate is now the lowest it has been since October 2021. Revisions showed inflation was slightly hotter than initially reported, and adding risk that a resurgence in pricing pressures is a possibility if demand does not adequately slow.
January Producer Prices
Both January wholesale and core producer prices came in hotter-than-expected last month. The headline print rose 0.7%, representing its biggest increase since June. On a year-over-year basis, wholesale prices increased 6%, which is still elevated but is well off the March 2022 peak of 11.2%.
Wholesale prices coincided with a 0.5% jump in last month’s consumer price report. Together, the metrics indicated that price pressures showed signs of receding as 2022 came to a close. However, so far in the New Year, the pace of disinflation has slowed. Many economists are attributing seasonal factors to the higher readings along with a rebound in energy prices.
February Consumer Sentiment
Consumer sentiment rebounded in February to the highest level since January 2022, adding to the narrative that if the economy does indeed fall into a recession, it will likely be short and shallow. Highlights from the University of Michigan Sentiment release for February included the following: current conditions improved significantly in February, reaching the highest level since December 2021.
Inflation expectations rose in February, but are still below December’s rate and were most likely driven up by the recent strong jobs report. Long-term inflation expectations are well-anchored at 2.9%, unchanged for the third consecutive month. Home buying conditions significantly improved in response to slightly lower mortgage rates, revealing the sensitivity markets have to rate changes. Bottom Line: Improved consumer sentiment will likely reignite conversations about a soft-ish landing.
Initial claims for the latest week came in below economists’ expectations as well as the prior weeks’ report while continuing claims did the opposite. Labor markets continue to show limited signs of softening amid increasing layoffs.
The following economic data and potentially market-moving events are slated for the week ahead:
Tuesday: PMI Composite (Feb), S&P Global PMI Manufacturing and Services (Feb), existing home sales (Jan)
Wednesday: FOMC Minutes
Thursday: Weekly initial and continuing unemployment claims, GDP chain prices (Q4), GDP revision (Q4)
Friday: BEA total light vehicle sales (Jan), building permits (Jan), core PCE deflator (Jan), PCE deflator (Jan), personal consumption expenditures (Jan), personal income (Jan), new home sales (Jan), Michigan sentiment (Feb)
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