Week in Review: February 24, 2023

February 27, 2023

Recap & Commentary

Markets ended the week lower, battered by concerns of resurgent inflation and the Federal Reserve System’s likely response to January’s higher readings. The release of the Fed’s preferred measure of inflation, personal consumption expenditures (PCE) corroborated the prior week’s Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data, reinforcing concerns that rather than winding down its rate hikes in 1H23, the Fed may need to increase the size of future rate hikes, consider additional rate hikes beyond what is currently forecast, maintain its ultimate terminal rate for longer than expected, or perhaps all three. Comments by multiple Fed speakers did nothing to quell concerns about the Fed’s need to remain aggressive, including those from noted “hawk” St. Louis Fed President James Bullard who said the Fed must “reestablish credibility now.”

In little more than a week, January’s inflation data shifted the conversation from one in which investors were starting to talk guardedly, if not openly, about the Fed pulling off an elusive “soft landing” to renewed concerns about a Fed-induced recession, as the central bank seeks to gain the upper hand on inflation.

Through Friday, 94% of S&P 500 companies had reported 4Q22 earnings. Thus far, 68% have beaten their consensus estimate. According to industry group FactSet, consolidated 4Q22 S&P 500 earnings growth is expected to by -4.8%.

Economic Commentary

Inflation, as measured by the PCE, increased 0.6% in January, the fastest pace since last June. Core PCE saw an identical increase. On a year-over-year basis, PCE rose 5.4% from a year earlier while the core metric was up 4.7%. Both reversed course after several months of declines.

Personal incomes rose 0.6% in January, supported by an acceleration in wage growth as wages and salaries grew 0.9% in January, more than twice as fast as in the prior month. Consumer spending jumped 1.8% from the prior month, marking the largest increase in two years. The January increase in personal spending reflected a pickup in outlays for goods and services, including motor vehicles as well as food services and accommodation.

The S&P Global Flash U.S. Manufacturing PMI edged up 0.9 points to 47.8, a four-month high, though it remained in contraction territory. New orders continued to contract at a sharp rate, as both domestic and export orders fell. Inventories continued to fall. The Flash U.S. Services PMI rebounded 3.7 points to 50.5 for its best reading since last June. New orders continued to decline but at a slower pace than in recent months, a sign of leveling off in demand. Job growth picked up at the quickest rate in five months.

New home sales rose 7.2%, beating expectations and notching the fourth consecutive monthly increase. Existing home sales, on the other hand, fell for the 12th straight month, decreasing 0.7% in January. That marked the longest run of declining home sales since 1968.

Of Note

Yields on the 2-Year Treasury reached 4.73%, the highest level since 2007. Up 0.65% since mid-January, the increase has resulted from recent inflation readings and questions/concerns about how the Fed will respond.

S&P 500 -2.7%
Small Caps -2.9%
Intl. Developed -2.5%
Intl. Emerging -2.8%
Commodities -0.8%
U.S. Bond Market -0.9%
10-Year Treas. Yield 3.95%
U.S. Dollar 1.3%
WTI Oil ($/bl) $76
Gold ($/oz) $1,818

The Week Ahead

  • ISM Manufacturing
  • ISM Services
  • Durable Goods Orders
  • Pending Home Sales
  • Consumer Confidence
  • Weekly Jobless Claims

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