Week in Review: February 3, 2023

February 6, 2023

Recap & Commentary

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%.

Economic Commentary

U.S. job growth accelerated sharply in January with nonfarm payrolls adding 517k jobs, well above the consensus 187k. In addition, December data was upwardly revised from 223K to 260K. Average hourly earnings rose 0.3% following a 0.4% gain in December. On an annual basis, wages increased 4.4%, decelerating from 4.8% in December. The stronger than expected wage growth stoked concerns about the Fed’s efforts to fight inflation but was offset to some extent by the continued moderation in wage growth.

Manufacturing activity as measured by industry group ISM, contracted for a third consecutive month, falling to its lowest level since 2009, excluding pandemic disruptions. Similarly, new orders fell to their lowest level since 2009, excluding the pandemic, reflecting continued slowing demand. Employment was one of the few bright spots, effectively unchanged for the month, suggesting that for now, companies continue holding onto workers. Unlike manufacturing, the service sector returned to growth in January after contracting in December for the first time since the pandemic. The rebound was led by a surge in new orders, corroborating other recent data points showing that consumers continue to shift spending away from goods towards services.

Job openings rose by 5.5% in December, the largest monthly increase since July 2021, to 11 million. That pushed the number of job openings per unemployed individuals to 1.9x, up from the November level of 1.7x.

Of Note

According to industry group Limra, 2022 annuities sales jumped 22% from 2021, to a record $311B. The growth was driven by strong demand for fixed annuities as investors looked to take advantage of higher interest rates.

S&P 5001.6%
Small Caps3.9%
Intl. Developed0.5%
Intl. Emerging-1.2%
Commodities-4.0%
U.S. Bond Market0.0%
10-Year Treas. Yield3.52%
U.S. Dollar1.0%
WTI Oil ($/bl)$73
Gold ($/oz)$1,878

The Week Ahead

  • Consumer Credit
  • Consumer Credit
  • Weekly Jobless Claims

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