Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
U.S. equity markets finished the week lower, as the Federal Reserve’s (Fed) latest interest rate hike triggered a selloff. For the week, the Dow Jones Industrial Average fell 1.7%, the S&P 500 declined by 2.1%, and the Nasdaq Composite ended the week 2.7% lower. U.S. Treasury yields fell as recession fears troubled global bond markets. The U.S. Treasury yield curve remained deeply inverted, with the 10-year note ending the week at 3.48%, while the two-year note yielded 4.19%. Oil prices tumbled on Friday, reversing gains from earlier in the week, as rate hikes from major central banks and declining industrial output among advanced economies worsened the outlook for global energy demand. The price of West Texas Intermediate (WTI) crude ended the week at $74.32 per barrel, down from approximately $78 per barrel on Wednesday. Despite Friday’s decline, WTI oil was up 4.7% for the week. The U.S. dollar was largely unchanged for the week. Gold was slightly lower, dropping 0.2% for the week.
Equities were dragged lower last week by hawkish commentary by the Fed, despite a step down in interest rate increases following four straight 0.75% rate hikes. Last Wednesday, the Federal Open Market Committee (FOMC) voted to raise the Fed Funds target rate by only 0.50%, leaving the Fed Funds target at a range of 4.25% to 4.50% and signaled further increase could be appropriate at the next meeting in February. In a statement by the Fed, it was reiterated that policies are aimed at being "… sufficiently restrictive to return inflation to two percent overtime." The statement continued by explicitly calling out the Fed is monitoring the "… cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." The Fed concluded by stating that "the Committee is strongly committed to returning inflation to its two percent objective." Fed Chair Powell in his press conference reiterated that the Committee "… will stay the course until the job is done." This action, in conjunction with Powell’s commentary, continues to signal that policy will need to be nimble and adaptable based on key economic figures and an environment struck with persistent inflation. Persistently high inflation, despite softening economic data, forced Fed Chair Powell to continue to hike rates last week and signal that more hikes are coming. The Investment Strategy Group’s view is that Fed officials will take action to curtail inflation while attempting to avoid derailing the economic recovery. Fed Fund futures indicated two-to-three additional 0.25% Fed Fund increases by the middle of 2023, placing the Fed Funds rate at 4.75%-5.00% or 5.00%-5.25% in June 2023.
In the week ahead a bill to fund the U.S. Government through September 2023 is expected to pass Congress, after the U.S. Senate passed a record $858 billion annual defense bill and stopgap spending bill to extend current government spending levels by a week. Reports on the U.S. housing market will be monitored this week, with the NAHB Housing Market Index due for release on Monday, followed by housing starts and building permits on Tuesday. Data on new and existing home sales for November will be released later in the week. On Friday, the Bureau of Economic Analysis (BEA) will issue the Personal Consumption Expenditures (PCE) Price Index for November, the Fed’s preferred gauge of inflation. Finally, corporations reporting earnings this week include Carnival, Nike, General Mills, FedEx, Micron Technology, and CarMax, among others.
As always, we will be watching and reporting to you next week. Thank you.
