- Despite a choppy week, the major indices finished up at least 1% on the week with the S&P logging its best day in over a month.
- Healthcare was the sole declining sector with most big tech names performing well, helped by a pullback in yields as the 10-year declined more than 30 bps.
- The December Jobs report, although the weakest month of 2022, was a surprise to the upside at 223k jobs added versus consensus of 205k, and a smaller than expected increase in hourly earnings.
- December ISM Manufacturing and Services reports are now both in contractionary territory, with services falling 6.9 points and falling below 49.6%.
- FOMC Minutes released provide further context on the Fed’s December 50 bps hike with some members clarifying that rate cuts will not occur anytime during 2023.
- The JPMorgan Global Manufacturing PMI closed below 50.0 for the fourth consecutive month, while Global Services PMI booked its third consecutive month in contraction territory.
- In China, regulators are exploring easing borrowing caps for some property firms and pushing back the grace period to repay debt.
- In Brazil, supporters of former President Bolsonaro vandalized congress, the presidential palace and the top court on Sunday as they refuse to concede that Lula won the presidential race.
US equities ended the week modestly higher to start the year, with 2023 bouncing back and forth between positive and negative territory before giving way to a strong rally last week when the S&P logged its best day in more than a month. Despite the choppy nature of the week all major indices ended up over 1%.
Value stocks outperformed growth stocks, with value ending higher by 3%, while growth was flat on the week. Treasury yields fell across the curve. The 10-year yield declined more than 30 bps from December’s close, and the 2’s/10’s spread moved further into contraction territory but remained off the most inverted levels. Oil prices were not able to overcome declines and fell more than 4% and 5%, respectively, closing down more than 8% on the week.
All sectors finished in the green, except for healthcare. Communication Services jumped with strength in broadcasting names Warner Brothers, Paramount, Dish, Comcast, Charter, and Disney. The market was also buoyed by big tech names META and NFLX, which both saw gains of more than 7% on the week. Consumer Discretionary performance was supported by homebuilders, apparel names, restaurants and casinos, all which outperformed broader markets. The former was boosted by the big pullback in yields which also helped building related products.
On the downside, managed care companies were lower with notable losses in the medical technology sector. Exploration and production, mortgage insurance, cloud software, solar, and certain grocers/ beverage companies also underperformed.
Despite the New Year, market activity continues to be influenced by many of the same themes from the 2022, such as inflation, recession concerns, and the Fed’s policy path. The most meaningful economic release in 2023 has been the release of December’s nonfarm payroll report.
New data showed that the labor market continued to be stronger than expected, with Friday’s report showing 223K jobs added last month, beating market consensus of 205K. In the most recent environment, labor market strength would be perceived as a negative, however, since the strong report was accompanied by a smaller-than expected monthly increase in average hourly earnings, it gave market participants confidence that the Fed’s hiking regime is helping to shift the inflation narrative. The non-farm payroll release was also the lowest number of jobs added during a single month for 2022.
Easing price pressures were also seen in the December ISM manufacturing report, which fell further into contraction territory, while the services report also unexpectedly fell 6.9 points into contraction territory. It was the services’ lowest reading since 2015. While cooling demand is evident with price gains slowing significantly, commentary was mixed.
Some businesses such as agriculture saw economic activity slow, while others such as finance and insurance were preparing for a possible recession in 2023. However, job openings per unemployed worker remain historically high, with unemployment at historic lows. In light of all this, the Fed has remained hopeful that they are still able to maneuver a soft landing, avoiding a recession as the labor market remains resilient following the Fed’s policy actions.
FOMC MINUTES RELEASED WEDNESDAY
During the release of the Federal Open Market Committee (FOMC) minutes, policy makers indicated that while they believe it is appropriate to reduce the magnitude of rate changes to 50 bps rather than 75, they remained committed to controlling inflation. There were no hints given as to whether the February meeting will result in a 25 bps hike or a 50 bps hike, with markets currently pricing in a 74% probability of a 25 bps raise.
Notably, no participants indicated that they felt that 2023 would be an appropriate time to begin cutting rates. Echoing this sentiment were comments from various Fed members, including Raphael Bostic and Mary Daly who have both said that rates will have to remain above 5% for an extended period and well into 2024. They also added that the Fed should not declare victory based on one month of data.
The Bloomberg World index advanced 1.95% the first week of the year, led by the value factor, up 2.32%, while growth climbed 1.26%. Fresh economic releases confirmed the slowing growth and decreasing inflation that we started to witness in the fourth quarter. The JPMorgan Global Manufacturing PMI closed below 50.0 for the fourth consecutive month, while Global Services PMI booked its third consecutive month in contraction territory. Brent oil is down over 8% year-to-date despite fading COVID restrictions.
In Spain, the rate of change of headline CPI decelerated for the fifth consecutive month to 5.6% annual growth in December, down from a peak of 10.7% in July. Electricity and fuel costs declines helped bring inflation down below the Eurozone average of 9.2%. Bank of Spain expects it will take another two years for consumer prices to return to the 2% target set by the European Central Bank (ECB). Prime Minister Pedro Sanchez announced a €10 billion package to help consumers as food inflation remains above 10%. Spain has already received a third of its allocation from the EU recovery funds and is eligible to receive another €160 billion. The IBEX 35 index gained 5.74% last week.
ECB policy maker François Villeroy de Galhau says he expects rates to rise further this year and peak in the summer. He added that rates could remain at the terminal level as long as needed to eliminate price pressures. The swaps market is pricing in the peak ECB deposit rate at 3.5%. The Eurozone Composite PMI, which measures business activity in the manufacturing and services PMI, remained in contraction territory in December at 49.3. The reading was modestly revised higher by S&P Global from a preliminary estimate of 48.8. The Euro STOXX index gained 5.5% last week, led by retail, up 9.83%. Banks rose 8.59% and technology advanced 8.33%. The relief rally could be attributed to declining natural gas prices due to better-than-expected weather conditions.
In China, regulators are exploring easing borrowing caps for some property firms and pushing back the grace period to repay debt. The measure is designed to help the property market as new home prices continue to fall. Additional initiatives include lower mortgage rates for first-home buyers and a nationwide cap on real estate commissions. In other news, the government issued crude imports quotas as refiners prepare to boost output. Independent refiners and traders will be allowed to import 111.8 million tons of crude. As mobility returns to normal in the aftermath of Covid Zero policy, demand for oil is expected to climb. Brent futures rose 1.4% on the news on Monday. The Shanghai Composite index gained 2.21% last week.
In Japan, Prime Minister Fumio Kishida said Bank of Japan (BOJ) needs to carefully explain to markets monetary policy as the bond market and the currency market remain volatile. The comment came after Bank of Japan performed unscheduled yield curve control in the last three trading sessions of 2022. Kishida added that he will discuss the relationship between government and Bank of Japan with the new governor that will be appointed in April. Last week, the yen maintained its momentum and rallied to the strongest level since June at 131 yen per dollar. In fact, since the BOJ policy pivot, the yen surged almost 5% on expectations that the era of ultra-dovish monetary policy is over. The NIKKEI 225 index dropped 0.46% last week.
In Brazil, supporters of former President Bolsonaro vandalized congress, the presidential palace and the top court on Sunday as they refuse to concede that Lula won the presidential race. Bloomberg Economics predicts that “political uncertainty could weaken the real by 1.8%, push stock prices down 3% and shave 0.7% off January economic activity”. This social unrest adds to the list of political uncertainty in Latin America in recent months. Indeed, the Peruvian President was removed from office and sent to jail after he tried to dissolve Congress last month. In Argentina, the president is trying to impeach the leader of the Supreme Court to put an end to a series of disagreements between both parties.
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