Investors patiently waited for the US Labor Department’s Thursday report on the consumer price index (CPI) and the greatly anticipated start of Q4 earnings announcements on Friday. Markets finished the week with solid gains on the news that the CPI came in on target, with headline prices falling 0.1% in December. With the help of a few mega-cap technology stocks (Amazon, Tesla and Microsoft), growth stocks outpaced value and more defensive sectors. The S&P Mid-Cap 400 and the Russell 2000 outstripped large caps, and oil snapped back, rebounding 8.4% in the week. European stocks followed suit for the second consecutive week on better-than-expected economic data and the expectation that the coming recession may not be as deep and as long as initially anticipated.
The economic calendar for the week was light, starting with Monday’s New York Fed release of the survey of the inflation outlook. The median one-year view dropped to 5%, the lowest level since July 2021 in the December survey. The medium-term outlook remained at 3%, while the five-year expectation increased slightly from 0.1% to 2.4%. Also, in the report, home prices growth expectations increased by 0.3% to 1.3%. Medium-term (one-year) growth in wages rose by 0.2% to 3%, and the expectations of unemployment rising one year from now decreased by 1.4% to 40.8%. The most significant drop in the report came in the category of Household Finance, where spending growth expectations fell to 5.9% from 6.9% in November.1 Also on Monday, the Federal Reserve reported consumer credit rose by $28 billion in November, a decrease of $1.1 billion from October. Revolving credit increased by 16.9% in November after rising by 10.4% in October. The growth in student and auto loans decreased over the previous month, increasing by 3.9% versus 6.5% during the last month. Growth in mortgage loans, the largest category, was not reported.2
On Tuesday, the NFIB Small Business Optimism Index reported a decline in optimism to 89.8 from 91.9. The latest reading is the 12th consecutive month below the 49-year average of 98. The report indicates that small businesses are not optimistic about 2023 business conditions as profits sag with the cost of materials rising and weaker sales. Small businesses account for nearly 50% of all private sector jobs and are the key driver for employment growth.3
On Thursday, the long-awaited CPI released by the US Bureau of Statistics reported that December inflation declined by 0.1%, as expected. The headline inflation rate for the last 12 months came in at 6.5%. The core inflation rate, ex-energy and food, rose 0.3% in December, bringing the 12-month inflation rate to 5.7%, still well above the Fed’s long-range target of 2%. In the all-items index, gasoline and fuel oil staged the largest decreases, falling 9.4% and 16.6% in the month. Other energy components rose slightly. Food increased by 0.3%, with food at home rising by 0.2%, one of the smallest increases in two years.4 We expect the Canadian inflation rate to drop following the US. Initial unemployment claims for the week ending January 7 were 205,000, decreasing 1,000 from the previous week’s revised level. The number of continuing claims from all benefit programs for the week ending December 24 shows an increase of 132,576 from the last period to 1,734,355.5
On Friday, The University of Michigan reported a jump in all indices, with the Index of Consumer Sentiment climbing to 64.6 from December’s reading of 59.7, Current Economic Conditions leaping to 68.6 from 59.4, and the Consumer Expectations Index with a more modest increase to 62.0 from 59.9.6
Market participants continue the recession debate of soft versus hard landing and the timing of pausing versus pivot for the Fed policy rates. In our opinion, the lagging data points (housing and rents), the labor market not indicating a severe recession on the horizon and the Fed interpretations are leading many analysts to believe the Fed is once again behind the curve and will over-tighten. Add to the mix war and other geopolitical pressures, and we think we have a cocktail for more volatility as we head further into 2023.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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