U.S. equities posted record highs on Friday after stronger-than-expected earnings from mega-cap technology leaders as well as a January jobs report that blew past market expectations. The S&P 500 Index was up 1.4% for the week. The Nasdaq Composite closed the week up 1.1% and the Dow Jones Industrial Average was up 1.4% for the week. U.S. Treasury yields were mixed last week with the 10-year U.S. Treasury note ending the week down twelve basis points to 4.02% and the 2-year U.S. Treasury note ending the week two basis points higher to 4.37%. The 2-year/10-year U.S. Treasury yield curve remained inverted, finishing the week at 35 basis points inverted. Gold finished the week 0.9% higher, ending the week at $2,037/ounce. West Texas Intermediate (WTI) crude oil was down by 7.6% for the week, ending the week at $72.12/barrel.
All eyes were on the U.S. Federal Reserve (Fed) last week, with investors attempting to anticipate the outlook for future monetary policy moves. Last week the Fed voted to continue to pause their interest rate increases, leaving the Fed Funds target range at 5.25% to 5.50%. In a statement the Fed noted that, “Recent indicators suggest that growth of economic activity has been expanding at a solid pace. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated”. The Fed’s statement concluded, “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent.” Persistent core inflation data and a still tight labor market resulted in the decision to keep rates elevated, despite witnessing overall inflation which continues to moderate from recent highs. Last week’s statement reflects our view that the Fed has finished its interest rate tightening campaign. While market participants are pricing in a high probability of interest rate cuts beginning in the first quarter of 2024, we remain skeptical and continue to believe that maintaining short term interest rates at current levels may prove more appropriate to ensure that inflation moves closer to the Fed’s 2.0% average inflation target over time.
On the domestic economic front last week’s January employment report showed continued strength in the domestic labor market. January nonfarm payrolls increased by 353,000. The 3-month average for total nonfarm payrolls increased to 289,000 from 227,000. The January unemployment rate was 3.7%, unchanged versus December. The labor force participation rate held steady at 62.5%. The key takeaway is that the biggest driver of the U.S. economy, the jobs picture, which feeds consumer spending, remains strong and that there is no sign of an imminent slowdown or recession. This report also suggest that the economy is strong enough that an interest rate cut in March appears less likely.
In the week ahead company earnings reports will continue with several consumer, health care, and energy companies set to provide their quarterly updates. Reports from Unilever, McDonalds, and PepsiCo will show U.S. consumer strength, while Ford and Honda Motor earnings will provide insight into the auto industry. Eli Lilly, Amgen, and AstraZeneca are among the pharmaceutical firms set to report, while ConocoPhillips and BP PLC will highlight energy companies. Investors will digest economic updates throughout the week including the Senior Loan Officer Opinion Survey, the U.S. trade deficit, consumer credit, and wholesale inventories. The week concludes with the annual update of seasonal factors for the Consumer Price Index (CPI), which could result in adjustments to previously released inflation figures.
As always, we will be watching and reporting to you next week. Thank you.
