Friday, December 23, 2022
U.S. and International Equities
Markets Mostly Lower
The major markets finished mostly lower this week as market participants remain concerned about the economic and profits landscape. Investors have been thwarted by the Federal Reserve’s (Fed) pushback to a potential pivot, given easing economic conditions. Moreover, according to the latest Bank of America flows report, global equity outflows totaled a record $41.9 billion in the week to December 21, as investors likely partook in tax loss harvesting.
Fixed Income Lower – as Yields Increase
The Bloomberg Aggregate Bond Index finished the week lower as yields increased. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished the week lower. Treasury yields have been inching higher, including the policy-sensitive two-year note. Furthermore, the 2-/10-year Treasury yield curve spread remains inverted as does the 3-month/10-year Treasury yield curve spread, both indicating a recession may be on the horizon.
The Bloomberg Aggregate Index (Agg) has seen a sharp decline in spreads since October. The Agg’s OAS peaked at 69 bps (0.69%) in October, and has tightened to 52 bps (0.52%) today as rate and credit markets have broadly rallied after two cooler-than-expected inflation prints.
Commodities Mostly Higher as Natural Gas Prices Selloff
Oil finished the week higher while natural gas prices sold off this week. Milder-than-expected weather in Europe caused this week’s selloff in natural gas given a volatile year for the commodity. The major metals, including gold, silver, and copper finished the week higher.
Economic Weekly Roundup
U.S. Consumer Confidence
The Conference Board Consumer Confidence Index rose over 7 points in December to 108.3, the highest since April, but still roughly 25 points below February 2020. The sharp increase was driven by improved sentiment toward current business conditions. However, the short-term outlook is still consistent with a recession.
U.S. Housing Activity Slowing
The December National Association of Home Builders (NAHB) index fell for the 12th consecutive month as borrowing costs and weakening demand suppress housing activity. Prospective buyer traffic was unchanged from last month and was the lowest since April 2020 when housing activity reached a standstill.
Bank of Japan News
In a surprise move, the Bank of Japan decided to widen the band for Japanese Government Bonds from +/- 25 bps (0.25%) to +/-50 bps (0.5%). The bank seeks to promote trade of domestic bonds, which has stagnated. Moreover, the bank will increase monthly bond purchases by $12 billion.
U.K. Retail Sales Weaker Amid Inflation
November retail sales in the U.K. fell 0.4% month over month, pushing the annual decline to 5.9%. Retail sales may further deteriorate, as households are likely impacted by higher utility bills. Online sales fell in the U.K., despite online discounts and promotions. Inflation has been rising faster than consumer incomes, crimping purchasing power and damping economic activity in the U.K.
European Business Conditions Improving
German GfK Consumer Confidence rose for a third consecutive month in December as German producer prices eased for a second straight month in November, coming in lower than economists expected. U.K. business confidence posted its strongest rebound in 20 months as labor market pressures in the country showed signs of easing.
Weekly and Monthly Employment Report
Both continuing claims for unemployment insurance as well as initial claims for the latest week came in below economists’ expectations. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Wholesale inventories (Nov), FHFA Home Price Index (Oct), S&P/Cash-Shiller Composite Home Price Index (Oct)
- Wednesday: Pending home sales (Nov)
- Thursday: Weekly initial and continuing unemployment claims
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