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December 19, 2022 - Hawkish Fed and Soft Data Drive Markets Lower

| December 19, 2022
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Index Performance

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U.S. and International Equities

Markets Lower

The major markets finished lower this week as market participants remain concernedabout the economic and profits landscape. Investors have been thwarted by the Federal Reserve’s (Fed) pushback to pivot, given easing economic conditions, especially in light of Thursday’s weaker-than-expected November retail sales report. Technical dynamics are also in focus as $4 trillion in option contracts expired last Friday.

Fixed Income Higher – as Yields Fall

The Bloomberg Aggregate Bond Index finished the week higher as yields continue to decline on expectations of an economic slowdown. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, gained ground for the week.

Commodities Mixed

Oil and natural gas prices finished the week higher on improved China COVID-19 headlines. As West Texas Intermediate crude oil lost over 42% from the March 8 highs through December 9, traders took advantage of the mark-down in the commodity’s price. The major metals, including gold, silver, and copper finished the week lower.

Economic Weekly Roundup

Inflation Easing

Headline inflation in November rose 0.1% month over month, pulling the annual rate of inflation down to 7.1% from 7.7% in October. Core CPI, excluding food and energy prices, rose 0.2% for November and 6% on an annual basis, compared with respective estimates of 0.3% and 6.1%. Inflation is easing and the Fed is on track to downshift the pace of rate increases.

Declining energy prices helped keep inflation in check. The energy index declined 1.6% in November, in part due to a 2% decrease in gasoline. That being said, food prices increased 0.5% and were up over 10% from a year ago.

Fed Tightens and Revises Inflation/Growth Rates

As many expected, the Federal Open Market Committee (FOMC) increased the fed funds rate by 50 basis points (0.5%) to a target range of now 4.25–4.50%. Moreover, the committee made upward revisions to both their inflation and interest rate forecasts for the next few years. The Committee delivered a well-telegraphed move, barely changing any verbiage from the previous statement, making a unanimous decision.

In addition, the Committee downwardly revised growth forecasts for both 2023 and 2024 as high inflation is expected to weigh heavily on consumer spending. Interest rates will likely be higher next year as the Committee believes inflation will not come down as fast as projected in September.

Bank of England and the European Central Bank Follow Fed’s Lead on Rates

The Bank of England (BoE) hiked rates by 50 basis points (0.5%) to 3.5% and informed investors that they are not done with increasing rates. Unlike the Fed, the BoE decision was not unanimous. The central bank is battling double-digit inflation, but with high unemployment complicating the situation for policy makers.

The European Central Bank also raised rates this week by 50 basis points (0.5%) to 2% and will continue on a moderate pace to reach a restrictive level. The ECB will also begin rolling off government debt purchased during the pandemic.

November’s U.S. Small Business Report

Although optimism among small business owners has inched marginally higher, inflation remains a key concern according to the latest survey from the National Federation of Independent Business (NFIB). According to the report, 32% of respondents noted it was the most important issue they were dealing with, while finding and keeping workers was also mentioned as another headwind. The NFIB report concluded that although the majority of small business owners generally viewed inflation as having peaked, 34% still mentioned they would need to raise prices.

Weekly and Monthly Employment Report

Both continuing claims for unemployment insurance as well as initial claims for the latest week came in below economists’ expectations. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.

Week Ahead

The following economic data and potentially market-moving events are slated for the week ahead:

  • Monday: NAHB Housing Market Index (Dec)
  • Tuesday: Building Permits (Nov), Housing Starts (Nov)
  • Wednesday: Current Account (Q3), Total Light Vehicle Sales (Nov), Consumer Confidence (Dec), Existing Home Sales (Nov)
  • Thursday: Weekly Initial and Continuing Unemployment Claims, Leading Indicators (Nov), Revised GDP (Q3)
  • Friday: Building Permits (Nov), PCE Deflator (Nov), Core PCE Deflator (Nov), Personal Consumption Expenditures (Nov), Personal Income (Nov), New Home Sales (Nov), Michigan Sentiment (Dec)

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