Hello, I’m Greg Curvall, Senior Portfolio Manager with Fifth Third Bank.
Last week US equities finished higher, with 2023 opening with an up-and-down string of sessions capped by a big rally on Friday. Treasuries were stronger across the curve, with the 10-year yield dropping more than 30 basis points from the December close, currently at 3.56 percent. The dollar was up after pulling back in five of the prior six weeks. Gold was also up. Oil was down last week, despite bit gains on Thursday and Friday.
The same themes are still at play in the New Year, including the path of inflation, the state of the labor market, and the Fed's policy response. On the Fed front, the big development was the release of the December FOMC meeting minutes on Wednesday. Though there was no hint as to whether the February meeting might favor a 25 or 50 basis point hike, the minutes indicated that no participants felt a pivot to rate cuts in 2023 would be appropriate.
Markets continue to price in the understanding that the Fed still has a ways to go to reach a sufficiently restrictive level for interest rates. These same markets realize that rates will likely remain "higher for longer" with any rate cuts in 2023 becoming increasingly unlikely. At the same time, the market is also waiting anxiously for the coming wave of fourth quarter earnings reports, with many believing that estimates still need to come down further. Nevertheless, other investors are upbeat about the upcoming earnings season given the recent wave of cost cutting initiatives, promising inflation data out of Europe, and the reopening of China, despite their ongoing Covid crisis.
Last week also saw several meaningful economic releases regarding inflation. The most significant of these was the December nonfarm payrolls report, which came in a bit higher than consensus but also saw downward revisions to October and November growth. Meanwhile, average hourly earnings posted a smaller-than-expected monthly increase, while November's surprisingly large spike was revised downward. Easing price pressures were also seen in the December ISM manufacturing and services reports.
Looking ahead to this week’s economic calendar, inflation concerns remain near the forefront, with the December Consumer Price Index, a popular gauge of inflation, coming out on Thursday. Consensus is currently looking for a flat reading on a monthly basis and the yearly rate to drop firmly below 7 percent for the first time since November 2021. Also, Fed Chair Powell is scheduled to join a panel discussion about central bank independence in Sweden on Tuesday, which has the potential to move markets. Lastly, earnings season will kick off this Friday with a burst of banks reporting.
As always, we will be watching and reporting back to you next week. Thank you.