U.S. and International Equities
Markets Mostly Higher
The major market averages finished mostly higher, led by growth sectors consumer discretionary, communication services and the information technology. Energy underperformed on the back of slowing demand. International stocks finished lower amid better-than-expected international economic results, U.S. dollar weakness and improving international earnings expectations.
Equities have done well despite fourth quarter earnings coming in lighter-than-expected. Thursday’s earning results from some big tech names revealed how macroeconomic pressures are weighing on corporate America regardless of their competitive positioning.
Fixed Income Higher as Yields Decline
The Bloomberg Aggregate Bond Index finished the week higher as yields declined as investors believe the Fed will pivot on monetary policy later this year. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished the week higher, leading all bond markets in year-to-date returns.
Given higher bond yields, U.S. pension funds are set to de-risk investment plans, which could send over $1 trillion into the bond market, according to a Bloomberg report. The largest U.S. corporate pension plans, as per the Milliman 100 Pension Funding index, have an average funding ratio of 110%, which is the highest level in two decades. Fixed-income flows are outpacing equity funds this year, marking the most lopsided relationship since July 2022.
Oil and natural gas prices finished the week lower. Natural gas prices continue to trending lower as warmer-than-anticipated weather and storage facility inventories remain at record seasonal highs. On Wednesday, U.S. government data showed large builds in crude oil, gasoline and distillate inventories as OPEC and its allies continue to follow their output policy. Amid weak demand, U.S. crude oil and fuel inventories increased to their highest levels since June 2021. The major metals, including gold, silver, and copper finished the week lower.
Economic Weekly Roundup
As many economists and market participants expected, the Federal Open Market Committee (FOMC) raised target rates by 0.25% to a range of 4.50% – 4.75%. Just one year ago, rates were between 0.0%–0.25%. In addition, during February 2022, the federal funds rate was close to zero, consumer price inflation already reached 7.9%, and yet the 10-year Treasury yield was 1.79%. Inflation clearly had more upside and from this vantage point, the Fed was late in pursuing price stability.
The FOMC is comfortable accepting that inflation has eased. This is a marginal step toward a pause which, in our opinion, will likely not happen until later this year as the Committee is expected to raise rates at least one more time.
Eurozone January headline inflation came in lighter than economists anticipated, while core inflation, which strips out food and energy prices, missed estimates. The decline in inflation was driven by receding energy prices, which increased by 17.2% compared with a 25.5% rise in December. With that being said, food, alcohol and tobacco prices climbed 14.1% year-over-year as well as from December’s 13.8% increase.
U.K. Consumer Health
Consumer credit in the U.K. rose 7.2% from a year ago, the highest annual growth rate since March 2019. High rates of inflation and lagging wage growth in the U.K. put pressure on consumers who did not have the level of savings that American consumers had throughout the pandemic. Mortgage approvals dropped in December and are now over 50% below August last year.
Initial and continuing claims for the latest week came in below economists’ expectations. With that being said, labor market conditions are softening amid slowing job growth, increasing layoffs, and higher unemployment. In January, the economy added over 500,000 jobs as the unemployment rate fell to its lowest level since May 1969. The blowout figures come just as the employment landscape began to show some signs of moderation as monthly data has been on a downtrend trend in recent months.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Trade Balance (Dec), Consumer Credit (Dec)
- Wednesday: Wholesale Inventories (Dec)
- Thursday: Weekly Initial and Continuing Unemployment Claims
- Friday: Michigan Sentiment (Feb), Treasury Budget (Jan)
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