Week in Review: December 2, 2022

December 5, 2022

Recap & Commentary

Markets ended the week higher, boosted by comments from Federal Reserve Chair Jay Powell that seemingly confirmed the Fed would reduce the size of its upcoming rate hikes to 0.50%, following four 0.75% rate hikes at each of its past four meetings. At a Brookings Institution conference, Powell indicated that “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.” He continued saying that smaller rate hikes may begin “as soon as the December meeting.”

However, Powell also reinforced a point he made following the Fed’s November meeting, saying, “the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.” In other words, smaller rate hikes may start as soon as December, but they will likely last longer than previously expected.

Friday’s strong-than-expected employment report renewed concerns that ongoing labor market strength, combined with continued strong wage growth, will maintain upward pressure on inflation, thereby forcing the Fed to remain aggressive for an extended period, or at least longer than investors would like.

In the near term, markets are likely to continue viewing “good” economic data as “bad,” as it did with the employment report, until inflation is low enough that “good” data no longer prompts fears of a more aggressive Fed.

Economic Commentary

The November employment report highlighted a busy week for economic data, which showed the economy added 263K new jobs, far better than the expected 200K. The gains came despite recent mass-layoff announcements by multiple tech companies. Unemployment remained steady at 3.7% as a decline in the labor force participation rate was effectively offset by a nearly equal decline in employment as measured by the household survey data used to calculate the unemployment rate. While other measures of inflation released during the week pointed to easing price pressures, average hourly wage growth accelerated 0.2% to 5.1%, which could continue to place upward pressure on prices.

According to industry group ISM, manufacturing activity declined in November to its lowest level since May 2020, weighed down by declining orders. From an inflationary standpoint, prices contracted at their fastest pace since May 2020 and 2016, excluding the pandemic.

The Fed’s preferred measure of inflation, core PCE (Personal Consumption Expenditures), corroborated the slowing trend in inflation seen in the most recent CPI (Consumer Price Index) and PPI (Producer Price Index) inflation reports. Compared to a year ago, core PCE slowed 0.2% to 5.0%.

Personal income rose a better-than-expected 0.7%, while personal spending increased by 0.8%, demonstrating consumers’ continued resilience. However, in a sign that consumers are draining their reserves in the face of higher inflation, the personal savings rate fell to 2.3% in October, its lowest level since 2005.

Of Note

On Friday, President Biden signed a bill preventing a rail strike that would have roiled supply chains and, by some estimates, cost the US economy upwards of $2B/day. The bill did not provide for any paid sick leave, something for which rail workers had been pushing.

S&P 5001.1%
Small Caps1.3%
Intl. Developed1.0%
Intl. Emerging3.5%
Commodities-0.3%
U.S. Bond Market1.5%
10-Year Treas. Yield3.49%
U.S. Dollar-1.4%
WTI Oil ($/bl)$80
Gold ($/oz)$1,811

The Week Ahead

  • Producer Inflation (PPI)
  • ISM Services
  • Consumer Credit
  • Consumer Sentiment
  • Weekly Jobless Claims

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