Market Currents – 2/7/23
- January Reversal. Stocks markets opened 2023 on a strong note, with robust gains across global equities. Signs that inflation is easing in several major regions helped propel the advance, raising hopes that central banks may be close to the end of their rate hiking cycle. China’s reopening after dropping their zero-Covid policy further supported bullish sentiment. The fixed income market also rallied, benefiting from a drop in yields across intermediate and long-term maturities.
- Inflation Update. Recent data show inflation continues to ease across many metrics, suggesting that inflation may have peaked in the summer of 2022. Headline consumer price index (CPI) inflation topped out at 9.1% in June, and has since declined to 6.5% in the latest read. Goods inflation, in particular, saw declines, helped by ongoing improvements in the supply chain pressures as well as lower gasoline and commodities prices.
- Service Inflation Remains Sticky. While significant progress has been made in goods inflation, they make up a smaller component of overall inflation. Fed officials and investors have turned their focus on service inflation, which has remained elevated. Service inflation is made up mainly of two components – rents and wages. Rents are calculated with a lag, and real time indicators point to much slower growth in 2023. However, wage growth in a tight labor market arguably remains the largest risk to containing inflation. Fed officials have highlighted wages as a key concern, and will be a primary factor when considering further adjustments to monetary policy.
- Federal Reserve. The Federal Reserve nudged up short-term interest rates by a quarter-percentage point in their February meeting. The decision represented a slower pace of tightening following six larger, consecutive increases to combat inflation (the central bank raised rates by half point in December, and by 0.75 point in November). The recent disinflationary trend was acknowledged, although Fed Chair Powell was careful not to feed into speculations with regards to a rate pause.
- Economic Resiliency. Despite the Fed’s commitment to putting a brake on the economy, the resilience of the job market and still robust consumer strength remain notable. Initial estimates of gross domestic product showed the US economy grew by 2.9% in the fourth quarter, and the most recent unemployment jobs report came in far above expectations with an impressive 517k jobs added in January. The reports lent some support to the view that the economy may not tip into recession, but instead undergo a sought-after “soft landing.”
- Market Outlook. After a challenging 2022, all investors welcome the positive start to the new year, and history is our ally. It is uncommon for the stock market to decline in back to back years. Likewise, it is even less common for bonds to post consecutive negative years. As headline inflation peaks, investors are now turning to the outlook for economic growth, and to the path of Fed rate policy, to set their course. We continue to monitor market developments, and will act accordingly, on clients’ behalf.