U.S. and International Equities
The major market averages finished lower, as the only sector to finish positive was energy. Energy performed well as oil prices rebounded on Russian production cuts. With the S&P 500 well above its October 2022 low and the 4,000 level, some investors believe the path to lower inflation and a Federal Reserve (Fed) pause could still be bumpy for markets. Underwhelming fourth quarter earnings have also added support for the market selloff.
Fixed Income Tumbles As Yields Increase
The Bloomberg Aggregate Bond Index finished the week lower as yields increased. Bonds have been directly influenced by hawkish Fed speak this week amid last week’s Powell comments regarding "disinflationary” conditions. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished the week lower yet are leading all bond markets in year-to-date returns.
According to the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices, released on Monday, over 40% of banks have recently tightened lending standards for commercial and industrial (C&I) loans. C&I loans are an important funding source for companies that can’t (or don’t want to) access capital markets for additional monies to fund growth initiatives or to just help pay the bills.
Commodities Mostly Higher
Oil and natural gas prices finished the week higher. Russian plans to reduce oil production next month after the West imposed price caps on the country’s oil and oil products helped to stabilize recent weakness. OPEC country officials believe that the commodity may resume its rally in 2023 as Chinese demand recovers after COVID curbs were lifted as well as a lack of investment limiting supply. Many commodity watchers believe oil could return to $100 a barrel. The major metals, including gold, silver, and copper finished the week mixed.
Economic Weekly Roundup
European Economic Outlook
The European Central Bank (ECB) believes the risks to both the inflation and growth outlooks are more balanced and the improved view on inflation sent Eurozone bond yields down. If the factors behind Eurozone’s inflation moderate, we believe Europe will eventually become more attractive for long-term investors. In addition to the regional environment, Eurozone growth is highly sensitive to China’s economy.
German inflation in January slowed to 9.2%, a five-month low for the country. Like previous months, the decline in the official inflation metric was from direct government support for household energy bills. Nevertheless, investors are likely seeing opportunities in Europe’s largest economy, allocating more assets into German debt. Unlike some of the emerging economies, Germany and other developed international countries are close to peak inflation rates.
Mexico’s inflation rates have not peaked yet, putting acute pressure on consumers and businesses alike. In January, the annual rate of inflation rose to 7.9% from 7.8% the previous month. Core inflation also accelerated in January to 8.5%, driven by rising food costs and higher prices on general services. In response, the Mexican central bank increased rates by 0.5% this week. The Mexican peso appreciated against the U.S. dollar since December, but trading has been more volatile in recent weeks as the path ahead for inflation appears muddled.
Initial and continuing claims for the latest week came in above economists’ expectations as well as the prior weeks’ report. Labor markets continue to show signs of softening amid increasing layoffs and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: NFIB Small Business Index (Jan), Consumer Price Index (Jan), Hourly Earnings, Average Workweek (Jan)
- Wednesday: Retail Sales (Jan), Capacity Utilization (Jan), Industrial Production (Jan), Manufacturing Production (Jan), Business Inventories (Jan), NAHB Housing Market Index (Feb)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Building Permits (Jan), Housing Starts (Jan), Producer Price Index (Jan)
- Friday: Leading Indicators (Jan), Export and Import Price Indexes (Jan)
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