The Week in Review 12/06/22

“There is nothing government can give you that it hasn't taken from you in the first place.”
–Winston Churchill

Good Morning,

A quiet week as we look for clues in Fedspeak as to what the future looks like...

Participants played a waiting game in front of Fed Chair Powell's speech on Wednesday and a slate of key economic data later in the week. The market liked what it heard in Mr. Powell's speech and things took off in a big way on Wednesday. Fed Chair Powell reportedly did not tighten the screws of his monetary policy position any further.

Some will contend that he actually loosened the screws a bit. We would argue that he showed up with his toolbox at the Brookings Institution but never took a tool out of the box. The market, waiting with bated breath for the Fed Chair to lower the hammer, then let out a huge sigh of relief when he did not. The market's worst fear then was not realized and that became a rally catalyst that ultimately triggered a huge short-covering rally and some chasing action as the S&P 500 broke above key resistance at its 200-day moving average.

It might have been an overreaction in our estimation because the Fed Chair repeated just about everything he said following the November FOMC meeting, but in splitting Fedspeak hairs, some added attention was paid to his summation that "the ultimate level of interest rates will be somewhat higher than previously expected" versus the original contention that "the ultimate level of interest rates will be higher than previously expected."

Mr. Powell's remarks (and tone) seem to lessen the fear of another 75-basis point rate hike. Granted the fed funds rate is still going higher from current levels, but market participants can smell a peak in the policy rate around 5.00% in the first half of next year. If the FOMC elects to raise the target range by 50 basis points at the December meeting, the target range will be 4.25-4.50%.

On Thursday, market participants received the October Personal Income and Spending Report, which favored the "smaller" rate hike at the same time it favored a soft landing possibility.

Personal income increased 0.7% month-over-month in October (consensus 0.4%) and personal spending jumped 0.8% (consensus 0.8%). The PCE Price Index was up 0.3% month-over-month (consensus 0.4%) and the core-PCE Price Index, which excludes food and energy, increased 0.2% (consensus 0.2%).

On a year-over-year basis, the PCE Price Index was up 6.0%, versus 6.3% in September, and the core-PCE Price Index was up 5.0%, versus 5.2% in September.

The key takeaway from the report was the improvement in the inflation readings, particularly the core-PCE Price Index given Fed Chair Powell's emphasis that the Fed's policy tools are better designed for working on core inflation.

The big rally effort ran into some resistance as market participants contended with the notion that the upside moves might have been an overreaction and that the growth environment is going to be challenging given the past rate hikes and the rate hikes that are yet to come.

A 49.0% reading for the November ISM Manufacturing Index (Institute for Supply Management), which is the first sub-50% reading (the dividing line between expansion and contraction) since May 2020, reined in some of the rebound enthusiasm.

The strength of the mid-week rally was tested again when market participants received the November employment report on Friday. Nonfarm payroll growth was higher than expected, the unemployment rate held near a 50-year low of 3.7%, and average hourly earnings increased at a robust 0.6% month-over-month, leaving them up 5.1% year-over-year.

The report itself was good news from an economic standpoint, yet the market saw it as bad news, thinking it will push out any eventual pivot by the Fed with its monetary policy. In brief, the report signals higher for longer with respect to the target range for the fed funds rate.

The initial retreat following the employment report saw the S&P 500 breach its 200-day moving average, but by Friday's close the index reclaimed a position above that level.

All in all, this week was a win for the bulls given that the market showed nice resilience to selling efforts and the S&P 500 held the line at that key technical level.

Nine of the 11 S&P 500 sectors closed with a gain on the week. Communication services (+3.3%) and consumer discretionary (+2.1%) enjoyed the biggest gains. Meanwhile, financials (-0.6%) and energy (-2.0%) were the lone sectors in the red by the end of the week.

In the Treasury market, there were big down swings predicated on the thinking that maybe the Fed won't have to raise rates as high as feared. The continued inversion along the yield curve reflects the festering concerns about the Fed raising rates into a weakening economy and inviting a recession. The 2-yr note yield fell 19 basis points to 4.29% and the 10-yr note yield fell 18 basis points to 3.51%.

Market Snapshot…

• Oil Prices – Oil prices fell ahead of Sunday’s OPEC meeting and an EU ban on Russian crude on Monday. West Texas Intermediate crude fell 1.5% lower on Friday, or $1.24 to finish at $79.98/barrel, while Brent crude dropped 1.5% for the day, or $1.31 to trade at $85.57/barrel.
• Gold – Gold prices slipped on Friday, retreating from a near four-month high. Spot gold fell 0.4% to $1,794.96 per ounce, while U.S. gold futures settled down 0.31% to $1,809.6 per ounce. Silver finished the week at $23.25.
• S. Dollar – The dollar index edged 0.1% higher against its rivals but was down 0.19% to close at 104.49. Euro/US$ exchange rate is 1.058.
• S. Treasury Rates – The 10-year Treasury yield pulled back about three basis points to 3.488% on stronger-than-expected labor data.
• Asian shares were up sharply in overnight trading.
• European Markets are trading mixed.
• Domestic markets are soft this morning.

Looking ahead…

This will be a relatively light week with the Fed’s anticipated December meeting on the docket for next week. Friday’s PPI report will be a good indicator of future CPI prints. The PPI report tells us what price increases producers are paying on imports for their goods. It is usually a leading indicator and has been declining over the past few months. That's a trend that has to continue for us to have any hope of the Fed taking their foot off the gas.

In the Treasury market, there were big down swings predicated on the thinking that maybe the Fed won't have to raise rates as high as feared. The continued inversion along the yield curve reflects the festering concerns about the Fed raising rates into a weakening economy and inviting a recession. The 2-yr note yield fell 19 basis points to 4.29% and the 10-yr note yield fell 18 basis points to 3.51%.

Market Snapshot…

• Oil Prices – Oil prices fell ahead of Sunday’s OPEC meeting and an EU ban on Russian crude on Monday. West Texas Intermediate crude fell 1.5% lower on Friday, or $1.24 to finish at $79.98/barrel, while Brent crude dropped 1.5% for the day, or $1.31 to trade at $85.57/barrel.
• Gold – Gold prices slipped on Friday, retreating from a near four-month high. Spot gold fell 0.4% to $1,794.96 per ounce, while U.S. gold futures settled down 0.31% to $1,809.6 per ounce. Silver finished the week at $23.25.
• S. Dollar – The dollar index edged 0.1% higher against its rivals but was down 0.19% to close at 104.49. Euro/US$ exchange rate is 1.058.
• S. Treasury Rates – The 10-year Treasury yield pulled back about three basis points to 3.488% on stronger-than-expected labor data.
• Asian shares were up sharply in overnight trading.
• European Markets are trading mixed.
• Domestic markets are soft this morning.

Looking ahead…

This will be a relatively light week with the Fed’s anticipated December meeting on the docket for next week. Friday’s PPI report will be a good indicator of future CPI prints. The PPI report tells us what price increases producers are paying on imports for their goods. It is usually a leading indicator and has been declining over the past few months. That's a trend that has to continue for us to have any hope of the Fed taking their foot off the gas.

The opinions expressed herein are those of Michael Hilger and not necessarily those of Raymond James & Associates, Inc., and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forcasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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