U.S. and International Equities
The major markets finished lower this week as market participants remain concerned about the economic landscape and potential further reductions in Q4 earnings estimates. Moreover, the deep 2- and 10- year yield curve inversion that highlights the Federal Reserve’s (Fed) prioritization of inflation over growth also has investors’ attention.
According to FactSet, the bottom-up estimate for Q4 S&P 500 Index earnings has declined by 5.6%, to $56.48 a share, since late September. The downward revision seen thus far for next quarter’s earnings marks the largest decrease in EPS estimates during the first two months of a quarter since the depths of the pandemic in Q2 2020.
Fixed Income Higher – as Yields Fall
The Bloomberg Aggregate Bond Index finished the week higher as yields continue to decline on expectations of a less aggressive Fed. Markets have embraced a downshift in Fed rate hikes, with a fifth c consecutive 75 bps hike next week no longer the consensus. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, lost ground for the week following their equity counterparts.
U.S. Treasury yields, across the Treasury yield curve, are significantly higher in 2022, with shorter maturity securities up by 4.0%. Moreover, intermediate and longer-term Treasury yields are higher by over 2.0%, taking the 10-year Treasury yield to its highest levels since 2007.
Oil and natural gas prices finished the week mixed. U.S. gasoline prices reached a new low for the year and are now lower than a year ago. As of Thursday, West Texas Intermediate crude oil prices are down 4.7% year-to-date. West Texas Intermediate crude oil has lost over 42% since the March 8 high. The major metals, including gold, silver, and copper finished the week mixed.
Economic Weekly Roundup
U.S. Producer Prices Increase Slightly in November
U.S. producer prices rose slightly more than expected in November amid a jump in the costs of services. That being said, the trend is simmering, with annual inflation at the factory gate posting its smallest increase in 1.5 years. Easing producer prices should foreshadow an improving inflation environment
German October Industrial Production Struggles
German industrial production fell by 0.1% in October from a month ago as manufacturing and energy activity declined. Germany, the largest economy in Europe, is approaching a recession as domestic demand slows. Investors should closely monitor inflation metrics as the German economy may be approaching an inflationary inflection point.
U.S. Services PMI Solid
U.S. Services PMI rose in November, bolstered by remarkably high business activity, which is 25% of the composite index. Prices paid dipped in November from the previous month as inflation pressures are easing in the services sector. Improved supply chains helped lower the backlog of orders. Backlogs are now the lowest since early 2021.
Decline in China Service Production
The Caixin China General Services PMI dropped in November for the 3rd consecutive month, from 48.4 to 46.7, the steepest contraction in the service sector since May and a clear sign of China’s current dire economic condition amid the COVID-19 lockdowns.
Weekly and Monthly Employment Report
Continuing claims for unemployment insurance for the latest week came in above economists’ expectations while initial claims came in below expectations for the second straight week. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Monday: Treasury Budget (Nov)
- Tuesday: NFIB Small Business Index, November CPI, Hourly Earnings (Nov), Average Workweek (Nov)
- Wednesday: Export and Import Price Index (Nov), FOMC Meeting
- Thursday: Weekly Initial and Continuing Unemployment Claims, Retail Sales (Nov), Capacity Utilization (Nov), Industrial Production (Nov), Manufacturing Production (Nov), Business Inventories (Nov)
- Friday: S&P Global PMI Manufacturing (Dec)
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on t the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
For a complete list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.