Hello, this is Claire Ellerhorst, Senior Portfolio Manager at Fifth Third Bank with this week’s Economic Beat.
Major U.S. equity indices were higher last week, with the S&P 500 Index up one percent in total return, the Dow Jones Industrial Average up nearly seven tenths of one percent and the Nasdaq Composite up nine tenths of one percent. Economic data releases last week supported the soft-landing narrative, reinforcing expectations that the U.S. economy may be able to avoid recession despite the Federal Reserve’s aggressive interest rate hikes over the last two years to tame inflation.
Among the economic reports, core personal consumption expenditures (PCE), one of the Fed’s preferred measures of inflation, rose in line with consensus in December. Core PCE was up 2.9% year-over-year last month, down from a 3.2% pace in November. Personal incomes were in line with expectations and personal spending was stronger than anticipated. The advance reading for fourth quarter gross domestic product (GDP) showed the economy growing at a 3.3% seasonally adjusted annualized rate, slower than the third quarter’s 4.9% pace but much better than anticipated. The measure for consumer spending in the GDP report also showed resilience, slowing modestly from the prior quarter to a 2.8% annualized rate.
The corporate earnings season has been somewhat lackluster thus far, with the number of companies beating earnings expectations for the fourth quarter running more than 5% below the five-year average according to FactSet data. Companies reporting a combination of better sales and earnings are being rewarded less by the market than the historical average and those that are missing expectations are underperforming more than average. The week ahead marks the peak of earnings season, with roughly 40% of the S&P 500 market capitalization set to report, including several major technology firms.
Economic data will be in focus again with releases on consumer confidence, the Job Openings and Labor Turnover Survey, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI), and the Bureau of Labor Statistics Employment Situation Report for January. The Federal Reserve meets for its January Federal Open Market Committee (FOMC) meeting. Officials are not expected to vote to change the Fed funds rate this week, but the meeting may provide additional clarity on when the Fed expects to start reducing interest rates. Despite the signs of still-strong economic growth, market expectations still reflect a roughly 50% chance of a rate cut in March, and nearly a 100% chance of rate cuts beginning by June.
As always, we’ll be watching and reporting back to you. Thank you.