Market sentiment driving the latest rebound was based on the confidence that the bulk of the US Fed rate increases was behind us, and after the expected 50-basis-point rate at the December 13 and 14 meeting, the pause or pivot was just over the next hill. The rally that started in mid-October fizzled last week on robust economic data dashing hopes of a change in the US Fed policy. The Bank of Canada raised rates by 50 basis points and signaled the rate hikes could be ending. The Bank of Canada is likely to pause or pivot before the Fed in the US. The S&P 500 had the worst week in five weeks, and the small-cap Russell 2000 suffered its worse week since mid-September. Oil fell over 10% in the week and, for the first time this year, fell into negative territory year-to-date. European equities also experienced a losing week on fears of recession and central bank tightening.
Defensive stocks, healthcare, consumer staples, and utilities held up better than longer-duration growth stocks, while energy stocks plummeted as the price of oil fell. Banks stocks also fared poorly, with comments from bank executives concerned with the depth of the coming recession and the resulting impact on operations.
On Monday, the ISM survey of business conditions at service-sector companies such as restaurants and banks confirmed the strength of the services sector. The survey in November rose to 56.5 percent, 2.1 percentage points over the October survey. (A reading over 50 indicates expansion). The Services Business Activity Index registered 64.7 percent, jumping nine percentage points over the October survey. The New Orders Index slipped slightly, drifting 0.5 percentage points lower than the October reading. The November survey is the 30th month in a row that the services sector of the economy has grown.1 The US Census Bureau reported factory orders for manufactured goods rose 1% in October in contrast to the ISM report last week, where prospects for manufacturing are in contraction territory.2
Productivity of American workers rose by a revised 0.8% annual rate in the third quarter, somewhat weak by historical standards. More troubling is the increase in unit labor costs rising to 5.3% year over year, reflecting a tight labor market.3 Increasing wages with a corresponding productivity gain signifies a healthy economy, whereas the inverse could spell trouble. On Wednesday, the Federal Reserve reported consumer credit rose by $27.1 billion in October. The increase in October is 6.9% annualized, up from a 6.6% gain in September. Credit card debt grew 10.4% in October as consumers dealt with inflation pressures reducing disposable income. Auto and student loans, considered nonrevolving credit, rose 5.8% but were lower than the previous month of 6.1%.4
In a sign that recent layoffs are slowly impacting the data, the Department of Labor reported Thursday that the unemployment initial claims data for December 3 rose to 4,000 from the previous week to 230,000. Continuing claims for all benefit programs for the week ending November 19 decreased 83,896 to 1,284,024.5 However, the advanced number for seasonally adjusted insured employment for the week ending November 26 showed an increase of 62,000 to 1,671,000. Unemployment claims have gradually increased from the low of 166,000 last spring and are one of the data points the Fed is closely monitoring.
Lastly, the University of Michigan survey of consumer sentiment and inflation expectations showed that sentiment rose to 59.1 in December from 56.8 in November. The inflation expectation over the next year fell to 4.6% from 4.9%, and the five-year inflation expectation remained steady at 3%. The economic conditions and consumer expectations survey rose in December to 50.2 from 58.8 and 58.4 from 55.6, respectively.6
In the coming week, the FOMC will meet, and after the meeting, Chairman Jerome Powell will hold a press conference explaining the committee’s decision. As in previous sessions, his tone and language will influence the market reaction in the coming days and weeks.
Sources:
2 https://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
4 https://www.federalreserve.gov/releases/g19/current/default.htm
5 https://www.dol.gov/ui/data.pdf
6 http://www.sca.isr.umich.edu/
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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