Hello, this is Claire Ellerhorst, Private Bank Investment Strategist at Fifth Third Bank with this week’s Economic Beat.
Major U.S. equity indices dropped for a third straight week last week, continuing to spiral downward. The S&P 500 index dropped 5.7% in total return, its worst weekly decline since March 2020. The tech-heavy Nasdaq 100 extended its dive into correction, falling 7.6%. The blue-chip Dow Jones Industrial Average lost 4.6%. The U.S. 10-year Treasury yield rose close to 1.90% at one point in the week but retreated back to end the week at 1.76%. International equities also fell, and the U.S. dollar strengthened modestly versus major peers.
In economic news, U.S. housing starts unexpectedly rose 1.4% in December, driven by an increase in multifamily housing. Building permits, a proxy for future construction, surged 9.1% last month. Existing home sales slid for the first time in four months, as inventory remains lean. Sales dropped 4.6% in December, a much steeper decline than anticipated. Weekly jobless claims rose for the week ended January 15 to 286,000, a three-month high. The current surge in COVID-19 cases may be having a larger impact on the labor market.
Turmoil continues at the Russia-Ukraine border as President Biden said he expects Russia to invade Ukraine and warned that a "disaster" awaits if Russia were to send in troops. Intelligence agencies warned that an attack could be carried out within a month.
Market participants are continuing to price in more hawkish Federal Reserve policy in the year ahead, likely a driver of the rout in stocks. Futures imply the Fed Funds rate will see four quarter point rate hikes this year, suggesting a one percent policy rate by the end of the year. While these estimates are sharply higher than expectations six months ago, the Fed Funds rate would still remain well below the rate of inflation, considered expansive monetary policy. There is also talk of an earlier and more aggressive reduction of Fed balance sheet assets – quantitative tightening – another method in which the central bank would be able to tighten monetary policy to help put downward pressure on inflation. A liftoff of rates at the March meeting now appears to be consensus.
In the week ahead, the Federal Reserve meets for its January meeting and officials are expected to set the stage for that rate hike in March. The possibility of quantitative tightening later this year will likely come up during the press conference with Fed Chair Jerome Powell following the meeting. On the economic calendar, we’ll also be watching the first reading on fourth quarter gross domestic product, expected to highlight a pickup in growth and consumption in the last three months of the year. The quarterly and monthly readings on core personal consumption expenditures, the Fed’s preferred measure of inflation, will be key indicators on price pressures. Consumer confidence and housing data are also on the docket.
As always, we’ll be watching and reporting back to you. Thank you.