Weekly Market Report: January 13, 2023
Last week we saw the beginning of the 4Q earnings season, a highly anticipated CPI report, and some risk on market sentiment countered by a ‘not so fast’ narrative on the part of the Fed. Markets latched onto the former with hopes of a soft landing driven by disinflation traction, firm labor markets, a healthy consumer, and strong corporate balance sheets. U.S. equity markets turned in their strongest week in two months, with large caps up 2.6% and small caps up 5.25%. Non-U.S. markets were even stronger with developed (+3.5%) and emerging markets (+3%) both benefiting from a notably weaker USD (-1.6%). Interest rates edged slightly lower last week with the 10yr UST closing back below 3.5%. Bullish talking points revolved around a dovish policy pivot, depressed sentiment and positioning, China reopening momentum/related policy support, and Europe potentially avoiding a winter energy crisis.
- Prevailing bullish talking points including disinflation trends/softening monetary policy, China reopening/policy support, depressed sentiment, Europe potentially avoiding a winter energy crisis, and a resilient U.S. economy are being countered by tight monetary policy and slowing economic growth indications translating to a cautiously optimistic near- term outlook.
Fear of demand driven inflation seems to be a key motivation for persistent Fed hawkishness in the face of slowing economic growth and objectively tight financial conditions.
Bianco Research made note that historically, when the 2 yr yield is above the fed funds rate, it historically marks the end of a Fed tightening cycle. Regardless, markets are pricing in a high likelihood of 25bps hikes for both the February (93%) and March (81%) meetings.
With wage growth being a primary driver of ex-shelter core services inflation, it’s worth noting the Atlanta Fed Wage Growth Tracker fell from 6.4% to 6.1% on a 3-month moving average basis, and a wage measure based on the average of regional Fed surveys all point to further easing.
Fourth quarter earnings season kicks off this week with consensus earnings and revenue of -2.2% and +4.1% respectively alongside a 2023 EPS estimate of approximately $230.
AAII sentiment has ticked higher with bullish sentiment rising from 20.5% to 25% last week and for the first time in two months and only the 11th in the past year, bearish sentiment came in below 40%.
Is the equity market overvalued? The long standing “Rule of 20” makes the case that the sum of inflation rate and the S&P 500 P/E multiple (TTM) averages about 20 over time. With a current multiple around 18x, either the PE or inflation need to decline to get us back to the “Rule.”
Encouraging GDP data out of Germany and the U.K. last week increased the possibility of a European soft landing with strong consumption/service sector data and easing energy prices leading the way.
Strategas noted the unusual turmoil for the House Speaker position is likely just a precursor to an inevitable battle over the U.S. debt ceiling debate later in 2023.
Economic Release Highlights
- CPI in December eased from 7.1% (0.1% MoM) in November to 6.5% (-0.1% MoM) in December. Core also moderated from 6.0% (0.2% MoM) to 5.7% (0.3% MoM).
- January’s UofM Consumer Sentiment survey registered 64.6, above the consensus estimate of 60.0 and high end of the range of estimates.
- The NFIB Small Business Optimism Index for December registered 89.8 versus the consensus call for 91.3.
- Atlanta Fed Business Inflation Expectations survey for expected 1yr inflation level came in at 3%, a slight downtick from the 3.1% level in December.