The Week in Review 12/19/22
“It isn't what we say or think that defines us, but what we do.” – Jane Austen
Another week of struggle… The week started on a more upbeat note following the previous week's losses. The market logged some gains in the first half of the week as participant’s awaited key economic data and the FOMC policy decision on Wednesday.
Some M&A activity on Monday, highlighted by Amgen acquiring Horizon Pharmaceuticals for $116.50 per share and Thoma Bravo acquiring Coupa Software for $81.00 per share, helped fuel the early positive bias.
In addition, the November Consumer Price Index (CPI) came in cooler-than-expected on Tuesday, which added fuel to the buying efforts on the notion that a welcome moderation in headline inflation should convince the Fed to temper the pace of its rate hikes and perhaps place a lower ceiling on its terminal rate. The knee-jerk buying brought the S&P 500 above its 200-day moving average.
At their intraday highs on Tuesday the Dow Jones Industrial Average was up 707 points or 2.1%, the Nasdaq Composite was up 428 points or 3.8%, and the S&P 500 was up 110 points or 2.8%. Those gains, however, were eventually reined in to a large degree, and while the major indices registered gains for the session, they closed well off those highs in a disappointing finish. Ultimately, the S&P 500 fell back below its 200-day moving average by Tuesday's close.
A deeper look at the CPI readings revealed a sticky, and elevated, core services number that forced investors to rein in their enthusiasm in front of the FOMC policy decision, the release of an updated Summary of Economic Projections, and Fed Chair Powell's press conference on Wednesday.
The major indices regrouped in early action on Wednesday and logged some decent gains in front of the FOMC announcement. Things changed abruptly, however, in the wake of the decision to raise the target range for the fed funds rate by 50 basis points to 4.25-4.50% and the indication in the Summary of Economic Projections that the median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%.
The vote to raise the fed funds rate was unanimous. Separately, it was announced that the Fed will continue to let $60 billion of Treasury securities and $35 billion of agency mortgage-backed securities roll off its balance sheet each month.
The so-called "dot plot" showed 17 of 19 Fed officials with a fed funds rate forecast above 5.00% in 2023 and two of the 17 had their dots above 5.50%. On balance, this was a hawkish-minded package that did not meet the market's more hopeful expectations for a more conciliatory Fed.
Fed Chair Powell spent almost all of his press conference talking tough on the need to get inflation back down to 2.0%, saying it is going to take substantially more evidence to give confidence that inflation is on a sustained downward path and that the Fed expects to sit at its terminal rate for some time. He eventually added that, while he thinks the Fed's policies are getting close to the level of sufficiently restrictive, the Fed's focus is not on rate cuts; hence, there are not rate cuts in the Summary of Economic Projections for 2023.
The inflation rate slowed for the second month in a row. November’s report showed a YoY inflation rate of 7.1%, down from 7.7% in October. Additionally, core CPI, which excludes food and energy, slowed to 6.0% YoY. Both are signs of slowing inflation and the Fed’s policies working, but there is still a long way to go.
Strikingly, the stock market made a noticeable rebound while the Fed chair was speaking, as did the Treasury market. The U.S. Dollar Index, meanwhile, faded back to a level that was lower than where it was before the announcement.
The action in the stock, bond, and currency markets suggested that market participants didn't think the Fed will have the runway to take off to a terminal rate that is north of 5.00%. The reason being is that there is an underlying expectation/fear that the lag effect of prior rate hikes is going to undercut the economy enough to pre-empt a move to the elevated levels envisioned in the latest Summary of Economic Projections.
Still, the indices faded into the close that day and saw continued selling over the remainder of the week, undercut by a larger concern that the Fed will overtighten and trigger a deeper economic setback.
Price action in the Treasury market this week was another manifestation of those Fed overtightening and recession related fears. The 2-yr note yield fell 14 basis points to 4.20% and the 10-yr note yield fell nine basis points to 3.48%.
Thursday's session was dominated by a slate of rate hikes from other central banks. Namely, the European Central Bank, the Bank of England, the Swiss national bank, and the Norges Bank. Hong Kong's Monetary Authority also raised its benchmark rate. Those moves coincided with the release of disappointing retail sales and industrial production data out of both China and the U.S., which exacerbated investors' concerns about a global economic slowdown.
The Dow, Nasdaq, and S&P 500 declined 764 points, 360 points, and 99 points, respectively, during Thursday's retreat. The direct connection for stock prices is that 2023 earnings estimates are at increased risk for downward revisions; hence, there were misgivings about current valuations. The same mentality prevailed on Friday's quadruple witching options expiration day. Broad based selling interest saw the S&P 500 breach support at its 50-day moving average.
In brief, the S&P 500 declined 5.0% from where it was just ahead of the FOMC decision on Wednesday to its closing level on Friday.
Ten of the 11 S&P 500 sectors lost ground this week. The heavily weighted information technology (-2.7%) and consumer discretionary (-3.6%) sectors were among the more notable laggards. Meanwhile, the energy sector (+1.7%) was alone in the green by Friday's close.
Market Snapshot…
- Oil Prices – Oil reacts to recession fears. West Texas Intermediate crude dipped $1.82, or 2.4% to $74.29/barrel, while Brent crude fell by $2.17, or 2.7% to trade at $79.04/barrel.
- Gold – Gold prices rose Friday, but remained on course for its biggest weekly decline since mid-November. Spot gold rose 09% to $1,792.91 per ounce, while U.S. gold futures firmed 0.8% to $1,802.6 per ounce. Sliver finished the week at $23.328.
- U.S. Dollar – The dollar index rose 0.2% higher against its rivals to close at 104.69. Euro/US$ exchange rate is now 1.068.
- U.S. Treasury Rates – The 10-year Treasury yield was up about four basis points to 3.49%.
- Asian shares were down in overnight trading.
- European Markets are trading higher.
- Domestic markets are indicated to open in the green this morning.
This week and next will be light in terms of activity. We will receive updated housing data and November’s PCE report. The PCE is the Fed’s preferred inflation measure and is anticipated to also come down slightly in tandem with the CPI. Earnings are another important indicator we should be watching.
We are off to celebrate the holidays with family, and friends… we wish you a safe and Merry Christmas and a Happy New Year!!
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