Friday, December 2, 2022
U.S. and International Equities
The major markets finished higher this week as Federal Reserve (Fed) Chairman Powell on Wednesday signaled smaller interest rate hikes during upcoming FOMC meetings amid improving inflationary conditions. Given discussions of interest rate stability, growth sectors communication services along consumer discretionary led this week’s market results. The energy sector lagged the markets this week on lower energy commodity prices.
During November, The Dow Jones Industrial Average closed up more than 20% off its September 30, 2022 closing low, which many interpret as the end of the bear market for the granddaddy of the modern equity index. The S&P 500 had consecutive months higher for the first time since August 2021, the fifth longest streak all time dating back to 1928 (including the S&P 500’s predecessor indexes). It’s a tiny sample, but all four times a longer streak ended, the S&P 500 was up a year later with an average return over 25%.
Fixed Income Higher – as Yields Fall
The Bloomberg Aggregate Bond Index finished the week higher as yields continue to decline on expectations of a less aggressive Fed. Markets have embraced a downshift in Fed rate hikes, with a fifth consecutive 75 bps hike next month no longer the consensus. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, gained ground for the week.
With Treasury yields falling 0.40% to 0.50% during the month, core bonds (per the Bloomberg Aggregate Bond index) were up 3.7% for November, which was the best month since December 2008. The most interest rate sensitive sectors like investment-grade corporate bonds (up over 5%) and mortgage-backed securities (up over 4%) outperformed during the month. National municipals were up 4.7%, while their high-yield counterparts were up 5.8%.
Commodities Mostly Higher
Oil and natural gas prices finished the week little changed. Last week, U.S. West Texas Intermediate (WTI) Crude oil reached prices not seen since December 22 of last year amid the softening fuel demand outlook, especially in China. The major metals, gold, silver, and copper, finished the week solidly higher.
Economic Weekly Roundup
Fed Chairman Jay Powell made comments at the Brookings Institute this week where he noted that a lot of factors propping up inflation are easing and that “the time for moderating the pace of rate increases may come as soon as the December meeting.” We expect the Fed to raise rates by 0.5% during the December meeting.
U.S. Consumer Confidence
U.S. consumer confidence in November fell to a four-month low on worrisome inflation expectations. November’s decline in confidence was entirely from those 55 years and older. In contrast, confidence improved for those 54 and younger. The tale of two incomes: inflation acutely impacts lower income households, while upper income households feel less of the pain. Consumer confidence rose in November for those making $75,000 or more. Home-buying plans are slowing, yet are still stronger than the summertime, indicating the geographic reshuffling continues.
German Retail Sales and Inflation
German retail sales came in well below expectations as inflationary conditions take hold. Non-food sales fell a staggering 4.5% from September and were down 5.5% from a year earlier. Moreover, the nation’s lackluster retail sales slump set up a weaker tone for fourth quarter growth.
German inflation rose 11.3% in November from a year ago, but consumer prices across the country eased from October as energy costs moderated during the month. Investors must grapple with the bifurcation between domestic and European inflation dynamics.
Japan Productivity and Consumer Confidence
Japan’s manufacturing Purchasing Managers Index fell below 50 in November—the first time in 22 months. Weak demand and a frail currency are creating headwinds for the world’s largest electronic goods manufacturer. Additionally, Japanese consumer confidence in November fell for the third consecutive month, the lowest since June 2020. The world’s third largest economy is feeling the impacts of slowing demand across Europe and America.
Weekly and Monthly Employment Report
Continuing claims for unemployment insurance for the latest week came in above economists’ expectations while initial claims came in below expectations. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
Last month, the economy added 263,000 jobs in November, a decrease from October’s upwardly revised 284,000 but a large upside surprise from the pre-release consensus estimate of 200,000, highlighting the continued resilience of labor markets even as job growth continues to slow. The unemployment rate for November came in at 3.7%.
The following economic data and potentially market-moving events are slated for the week ahead:
- Monday: BEA Total Light Vehicle Sales (Nov), PMI Composite (Nov), S&P Global PMI Services (Nov), durable orders (Oct), factory orders (Oct), ISM Services (Nov)
- Tuesday: Trade Balance (Oct)
- Wednesday: Unit Labor Costs (Q3), Productivity (Q3), Consumer Credit (Oct)
- Thursday: Weekly initial and continuing unemployment claims
- Friday: Producer Price Index (Nov), University of Michigan Sentiment (Dec), wholesale inventories (Oct)
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