Week in Review: February 3, 2023

Markets enjoyed another strong week, cheered by the Federal Reserve System’s decision to slow the pace of its rate hikes to 0.25%. Friday’s employment report created some angst, however, as the largest pace of job gains in six months served as a reminder that the Fed must remain vigilant in it’s battle against inflation.

As expected, the Fed raised rates by 0.25% at its January meeting and stated that “ongoing” increases will be “appropriate” to ultimately return inflation to around 2%, which as Chair Powell noted in his press conference afterwards, will “likely require maintaining a restrictive stance for some time.” In a nod to the recent decline in inflation data, Powell acknowledged that “the disinflationary process has started,” particularly for goods, but thus far has not occurred for services, which constitute the majority of the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) index. Until that occurs, the Fed will likely feel compelled to maintain its restrictive policy measures.

Across the pond, both the Bank of England and the European Central Bank raised rates by 0.50%, with the latter indicating it will do so again in March. While all three banks are likely to enact additional hikes in 2023, the general sense is that they are nearing the end of their respective rate hike cycles.

Through Friday, 50% of S&P 500 companies had reported 4Q22 earnings.  Thus far, 70% have beaten their earnings estimates. According to industry group FactSet, consolidated earnings growth for 4Q22 is expected to be -5.3%.