The Week in Review 1/23/23

"If everyone is moving forward together, then success takes care of itself."
~ Henry Ford

Good Morning ,

The 2023 rally hit a snag last week… investors might have been looking to take some money off the table after sizable gains over the previous two weeks. In addition, growth and rate hike concerns, which had been put on the backburner to start the year, seemed to be back in play.

The market initially reacted positively on Wednesday to the welcome slowdown in inflation reflected in the December Producer Price Index (PPI) (actual -0.5%; consensus -0.1%). Any optimism that may have come from the pleasing PPI report quickly dissipated, though, as investors digested the weak retail sales and manufacturing data from December.

Retail sales fell 1.1% month-over-month in December (consensus -0.8%) after falling a revised 1.0% in November (from -0.6%) and industrial production decreased 0.7% month-over-month in December (consensus -0.1%) after decreasing a revised 0.6% in November (from -0.2%).

Equity markets sold off on Wednesday due to the understanding that the Fed is likely to remain on its rate hike path in spite of a weakening economic backdrop, increasing the risk for a policy mistake to trigger a deeper setback. Selling efforts had the S&P 500 take out support at its 200-day moving average.

Market participants also received official commentary on the economy when the FOMC released its latest Beige Book at 14:00 ET Wednesday. On balance, contacts generally expected little growth in the months ahead. St. Louis Fed President Bullard (non-FOMC voter) fueled the market's concerns saying that he would prefer that the Fed stay on a more aggressive path, according to CNBC, but added that the prospects for a soft landing have improved.

Thursday's trade looked a lot like Wednesday's trade with investors reacting to more data and commentary pointing towards weakening growth and the possibility of the Fed making a policy mistake.

Building permits decreased for the third consecutive month in December (actual 1.330 mln; consensus 1.370 mln). That report, however, contained one positive element, as single-family starts grew 11.3% month-over-month.

Weekly initial claims were released at the same time, which decreased to their lowest level since late September (actual 190,000; consensus 212,000), implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.

JPMorgan Chase CEO Jamie Dimon said in a CNBC interview Thursday morning “I think there’s a lot of underlying inflation, which won’t go away so quick,” adding that he thinks rates will top 5.0%.

As earnings season progresses, the main sticking point for stock market participants is the potential that weaker growth will translate to further cuts to earnings estimates.

Dow component Goldman Sachs sold off sharply on Tuesday after reporting below-consensus earnings and revenue, along with increased provisions for credit losses. So far, however, quarterly results have generally received positive reactions from investors.

In contrast to Goldman Sachs, Morgan Stanley received a favorable reaction despite a Q4 earnings miss.

Another notable name that reported earnings was Netflix, which surged 8.5% on Friday and led to renewed interest in the tech space. This helped drive the sentiment shift that fueled a very strong rally effort on Friday.

The rebound effort to close out the week had the Nasdaq Composite recoup all of its losses while the S&P 500 and Dow Jones Industrial Average put a nice dent in their weekly losses.

The S&P 500 was able to climb back above its 200-day moving average by Friday's close.

Only three S&P 500 sectors were able to log gains this week -- communication services (+3.0%), energy (+0.7%), and information technology (+0.7%) -- while the industrials (-3.4%), utilities (-2.9%), and consumer staples (-2.9%) sectors suffered the steepest losses.

The 2-yr Treasury note yield fell two basis points this week to 4.20% and the 10-yr note yield fell three basis points to 3.48%. The U.S. Dollar Index fell 0.2% to 101.99.

WTI crude oil futures rose 2.3% to $81.69/bbl and natural gas futures fell 5.3% to $3.03/mmbtu.

Separately, Treasury Secretary Yellen notified Congress via a letter that the debt ceiling has been reached, prompting the Treasury Department to begin employing extraordinary measures. Here we go again…

The U.S. reached its debt limit last week, and Congress has yet to act on raising the limit. The debt ceiling is the maximum level of debt the country is legally allowed to issue – and is usually raised without too much of a debate. Since 1960, Congress has either permanently or temporarily raised the ceiling 78 times _{(Source: U.S. Treasury).}

Once in a while, however, politics ensue, and debate is engaged on its merits.

Market Update…

• Oil Prices – Oil prices rose about $1 a barrel Friday and posted a second straight weekly gain. West Texas Intermediate crude gained $1.03, or more than 1% to settle at $87.64/barrel. Brent futures settled at $86.82/barrel, up by 0.77%.
• Gold – Gold prices edged lower on Friday as the dollar firmed. Spot gold fell 0.15% to $1,925.33 per ounce, while U.S. gold futures gained $4.30 to settle at $1,928.20 per ounce. Silver finished the week at $21.365.
• U.S. Dollar – The dollar index edged up 0.9% to close at 129.58. Euro/US$ exchange rate is now 1.089.
• U.S. Treasury Rates – The yield on the 10-year Treasury was trading at 3.488% after rising by 8 basis points.
• Many Asian markets are closed for the Lunar New Year.
• European Markets are trading mostly in the green
• Domestic markets are trading higher this morning.

This will be an eventful week… Q4’s GDP report is due out Thursday, and the PCE (Personal Consumption Expenditures) report will be released on Friday. Through the first three quarters of 2022, real GDP has been effectively flat. Markets are looking for a stronger report to prove that the economy is still on the right track. The expectation is for a growth rate of 2.6%.

We will also enter the heart of earnings season. Nearly 20% of the S&P 500 will be reporting, including GE, Comcast, Dow Chemical, Visa, IBM, and Verizon, to name a few. Ultimately, we expect inflation to hurt companies’ top and bottom lines. We will be watching to see which companies have the greatest pricing power and are still able to increase their earnings despite these massive headwinds.

Have a wonderful week!

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