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 nearterm 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 2yr 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.
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