U.S. and International Equities
The major markets finished higher to begin the New Year thanks to Friday’s rally on the jobs report. Slower job growth and moderating wage gains gave market participants the Goldilocks-type report they wanted to help ease concerns about an overly aggressive Fed.
Earnings should soon begin to get more attention as reporting season approaches. Seven of 11 S&P 500 sectors are expected to see earnings contract in this coming earnings season, making overall S&P 500 earnings growth unlikely. Only the energy, industrials, real estate, and utilities sectors are expected to show growth.
International equities performed well this week as China’s policy for the New Year focuses on economic growth vs. COVID-19 containment. In addition, developed international equities outperformed the S&P 500 Index as Eurozone headline inflation slowed sharply in December given lower energy prices. However, the core inflation rate, which strips out food and energy prices, reached a record high.
Fixed Income Higher as Yields Decline
The Bloomberg Aggregate Bond Index finished the week higher as yields declined on the latest evidence of easing wage pressures. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished the week higher.
U.S. high yield bonds outperformed U.S. investment-grade corporate bonds as well as U.S. equities in 2022, although all three markets suffered deep losses. Yields for the Bloomberg High Yield Index rose by 4.75% in 2022 to close the year just under 9%.
Commodities Mostly Higher as Natural Gas Prices Sell Off
Both oil and natural gas prices sold off this week. Warmer-than-expected weather in Europe caused this week’s selloff in natural gas given a volatile year for the commodity. Moreover, European natural gas prices have now fallen to their lowest level since before the Russia-Ukraine conflict. The major metals, including gold, silver, and copper finished the week mixed.
Economic Weekly Roundup
German Inflation Improving
German consumer prices fell roughly 1% in December, the second consecutive monthly decline. The annual rate of inflation is 8.6%, down from the peak of 10.4% in October. Headline inflation artificially eased after the government subsidized gas bills for some households in December, distorting the monthly calculations. Excluding energy, other categories of inflation appear to be easing, potentially adding attractive opportunities in Europe in the near-term.
China Purchasing Manager Index
The China Composite Purchasing Managers Index (PMI) fell over four points in December to 42.6, the lowest level since February 2020. Economic activity contracted in the month, despite the government’s decision to relax COVID-19 policies. Shanghai is reportedly struggling with a 70% infection rate since the change in health restrictions.
December ISM Manufacturing Report
The December ISM Manufacturing Report shows manufacturing activity contracted for the second consecutive month, falling to the lowest since May 2020, and showing that economic activity is slowing. Despite slowing activity, employment grew in December, as the labor market remains tight. New orders contracted for the fourth consecutive month and indicate future activity will slow.
Weekly Employment Report
The biggest data point of the week came on Friday with the December payroll employment report that revealed decelerating wage growth. Annual wage growth was 4.6%, the slowest gain since August 2021. The economy added 223,000 jobs in December and the unemployment rate edged down to 3.5%. Leisure and hospitality, health care, and construction sectors all added sizable job gains.
Bottom Line: Slowing wage growth will help inflation ease further, good news for the Fed and one of the potential tailwinds for 2023.
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.
The following economic data and potentially market-moving events are slated for the week ahead:
- Monday: Consumer Credit (Nov)
- Tuesday: NFIB Small Business Index (Dec), Wholesale Inventories (Nov)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Consumer Price Index (Dec), Hourly Earnings (Dec), Average Workweek (Dec), Treasury Budget (Dec)
- Friday: Export/Input Price Index (Dec)
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