Hey everyone, we should have an interesting finish to 2022. Most investors have lost money this year but our Trader User Group has knocked the ball out of the park and I see the same thing for 2023. There will be plenty of surprises for sure across many different asset classes. This past week we did have some interesting input from our favorite Fed Chair, “Boom Boom” Powell. Get me take on where the markets currently stand.
WEEKLY SOUND BITES:
- The major indexes ended higher, buoyed by the possibility that the Federal Reserve may slow the pace of its interest rate increases. Comments from Fed Chair “Boom Boom” Powell signaling smaller interest rate hikes going forward drove Treasury yields lower this week. On Friday, however, yields partially retraced their earlier moves after U.S. employment data showed strong hiring and wage inflation in November. The S&P’s return of 14.1% in the past 2 months puts the period in the 98th Percentile for 2-month returns going back to 1936.
- The jobs market was an area of focus, with “Boom Boom” Powell telling the audience at the Brookings Institution that labor demand would likely need to soften as the central bank seeks to bring inflation under control. Economic Data showed that the number of job openings declined by about 353,000 to 10.3 million—a level that was slightly below a consensus estimate for 10.4 million available positions. Nonfarm payrolls data showed that the U.S. economy added 263,000 jobs in November, exceeding a consensus estimate that had called for the pace to slow to about 200,000. The unemployment rate remained at 3.7%. Consumer Spending increased 0.8%, or 0.5% on an inflation-adjusted basis, sequentially in October. The core personal consumption expenditure price index, which excludes volatile food and energy costs, increased 5.0% year over year, moderating from the 5.2% inflation rate recorded in September. The Institute for Supply Management’s purchasing managers’ index (PMI) for manufacturing slipped to levels corresponding with a contraction in activity for the first time since May 2020, as the uncertain economic environment appeared to weigh on demand.
- The strong Jobs data could put the FEDs in a position of having to lift the Fed Funds target rate higher than 5%. The current rate is 3.75-4.00% and with an 80% probability of a 50-bps hike on Dec 14th would suggest we still have more rate hikes coming. The yield curve’s inversion has gone from modest to significant in the last couple of weeks. A recession may be nigh, but there is another very distinct possibility when it comes to the yield curve: investors may be pricing in a future with lower inflation, not an impending economic downturn. On one level, when longer-term Treasury bond yields are lower than short-term yields, it means investors think the fed-funds rate will be lower in the future than it is now – likely because the Fed will need to cut rates to revive a slowing economy. The market may be betting that inflation will be low enough next year to allow the Fed to take this action.
- Shares in Europe rose for a seventh week running, as lower inflation spurred hopes that central banks could slow the pace at which they are tightening monetary policy. Inflation in the eurozone slowed in November for the first time in 17 months. Smaller increases in energy and services costs helped push consumer price growth down more than expected to 10% from a record high of 10.6% in October. Inflation decelerated in 14 of the 19 eurozone member states.
- On the economic data front, Japan’s industrial production fell 2.6% month on month in October. This decline, which was more than expected, stemmed from decreases across the production machinery, electronic parts and devices, and chemicals industries. Prime Minister Kishida signaled that Japan’s defense budget would be increased to 2% of GDP by fiscal 2027, representing a doubling in spending.
- Chinese markets fell early last week following reports of civil unrest in major cities nationwide over the weekend. However, signs that China was edging away from its zero-tolerance approach to the coronavirus lifted sentiment. In economic news, official PMI readings for manufacturing and nonmanufacturing weakened in November. The private Caixin China General Manufacturing PMI rose more than expected to 49.4 from October’s reading. However, the measure remained under 50, indicating contraction as coronavirus outbreaks curtailed manufacturing activity nationwide.
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