• With every year end comes an annual data dump of calendar year market history lessons beginning with Bloomberg pointing out that the S&P 500 has fallen two straight years only four times since 1928 (WWII, Great Depression, dot‐com bubble, 1970’s oil crisis).

• With core inflation ex‐shelter being highlighted by the Fed as a key focus point with monetary policy implications, the trend is clear but importantly, the terminal level remains very unclear.

• The BoJ caught markets off guard last week by increasing the upper bound of its 10yr JGB target from 0.25% to 0.5% but left their funding rate of ‐0.10% unchanged.

• The Covid situation in China has left the economy and overall public health in a state of limbo where models and anecdotal information are estimating 1mm new infections and 5,000 deaths daily. Curiously, despite the abrupt end to zero Covid policy, daily public transportation volumes have fallen precipitously since early December policy change.

• A Bloomberg note on the declining personal savings rate made clear an important distinction between personal savings rates and consumer liquidity/balance sheet strength.

• The December Housing Market Index came in at 31, falling short of forecasted 34 and below consensus range of 32‐35.

• November Housing Starts (1.427mm) and Permits (1.342mm) came in above and below their forecasts respectively. Existing Home Sales of 4.09mm was slightly below consensus but within the consensus range, down 7.7%MoM and down 35.4% YoY.

• Consumer Confidence reading for December came in well above the point forecast (108.3 vs 101.0) and consensus range of 98.0‐103.0.

• The third and final estimate of Q3 U.S. GDP was revised higher from 2.9% to 3.2% (A/R) with Personal Consumption revised up from 1.7% to 2.3% (A/R).

Market focus this week was on the FOMC meeting and the economic calendar. Neither the FOMC statement or CPI report delivered a meaningful violation of the narrative, but Powell’s hawkish press conference and FOMC projections highlighted increased inflation projections in 2023 sent a charge of anxiety into markets. U.S. and developed international equity markets finished down approximately 2% while emerging markets fell 3%. Bond markets benefited from falling yields with the 2yr UST dropping to 4.17% and 10yr UST to 3.48% but credit spreads widened marginally to 454 bps.

• The 8th and final FOMC policy announcement of the year delivered a 50-bps rate hike as expected but was accompanied by a hawkish Powell press conference and SEPs.

• The Fed projected higher inflation in 2023 and 2024, lower GDP growth, and rising unemployment. The dot plot showed higher median Fed funds forecasts in 2023 of 5.1% and 2024 of 4.1%. Market reactions were muted but remain at odds with formal Fed forecasts.

• A second consecutive cooling U.S. CPI reading for November came with fairly broad-based price deceleration with energy, used vehicles, airfares, and medical care services declining and the pace of shelter inflation beginning to slow down.

• One of the Fed’s preferred indicators, the 3m/10yr yield curve spread is sitting over 80 bps inverted, a clear signal that monetary policy is well into restrictive territory.

• The ECB hiked by 50 bps to 2.5% and announced the start of quantitative tightening while Lagarde underscored an expectation of a shallow and short recession. The BoE also hiked an expected 50bps to 3.5%.

• The global GDP weighted policy rate was 4.14% prior to last week, at the 58th percentile of all year-end rates since 1960. However, the 2.3% increase in 2022 beat 1973 and 1980 as the fastest annual hiking pace on record.

• The 2023 economic and earnings outlook feels incrementally less encouraging with the possible onset or anticipation of recession both very much in play. Equity market challenges include expected downward guidance in earnings along with potential multiple compression.

• 4Q GDP Nowcasts from St. Louis and Atlanta Feds are both projecting positive growth but differing forecasts with St. Louis modeling 0.72% and Atlanta modeling 2.8%.

• Japan rolled out a 5-year military buildup plan, their largest spend since WWII, elevating them to the third largest military spender behind China and the U.S. Macro considerations are becoming increasingly clear with the geopolitical backdrops of Russia/Ukraine, China, and the middle east.

• The reopening (albeit chaotic) of China’s pandemic restrictions is making more sense given the batch of economic data last week (retail sales, industrial production, fixed asset investment, urban unemployment) all missing expectations.

• Congress passed a CR to keep government funded through December 23rd with a negotiated omnibus spending package reportedly in sight to avoid a government shutdown.

• Legislation was introduced to ban TikTok fully in the U.S. while many state and all federal employees already have bans in place or in process.

• November YoY headline (7.1%a vs 7.3%e) and core CPI (6.0%a vs 6.1%e) alongside MoM headline (0.1%a vs 0.3%e) and core (0.2%a vs 0.4%e) all came in below forecast.

• December’s U.S. PMI (C, M, S) of 44.6, 46.2, 44.4 came in below consensus across all three measures. Japan’s PMIs of 50.0, 48.8, 51.7 came in above consensus. Eurozone PMIs of 48.8, 47.8, 49.1 were also higher than forecast.

• Retail Sales for November was softer than forecast (-0.6% vs -0.2%) but within the consensus range of -1.1% to 0.4%. YoY retail sales growth is up 6.5%.

• November Industrial Production fell 0.2%, on the low end of the range and spot forecast of 0.1%.

• November NFIB Small Business Optimism Index registered 91.9 vs consensus estimate of 90.8.

The beginnings of holiday season liquidity, a light economic calendar, and most eyes on this week’s FOMC meeting left little for markets to latch onto last week. Global equity markets walked back some October/November gains with the S&P 500 (-3.4%), developed international (-1.2%), and emerging international (-1.3%) all losing ground. Interest rates edged slightly higher for the week with both 2yr/10yr and 3mo/10yr slopes at multi-decade inversion levels. Commodity markets gapped lower on the back of falling crude oil prices driven primarily by demand concerns given the global economic growth trajectory and China’s tenuous economic/Covid situation.

• With markets looking for rate cuts sometime in 2023, an Arbor Data Science chart of historical Fed tightening cycles shines an interesting light on the scale and duration of the current cycle.

• This week’s FOMC meeting will shed light on interest rate policy and economic projections which, in turn, will ultimately be guided by a wide range of metrics including inflation data, survey results, and market inflation pricing indications.

• A little bounce in bond markets over the past month of approximately 5% still has bond investors sitting deeply in the red and now at a record 28 months without a new bond index high.

• MRB made note that the recent bond market rally has coincided with an ‘endorsement’ from a credit spread perspective with U.S. Euro, and emerging market spreads all tightening in sync.

• Both the 10y3m and 10y2y curves touched their deepest inversions since 1981, with only one day exception on the 10y3m – September 12, 2001.

• A look at a chart of the S&P 500 reinforces the notion that we remain clearly in a down trending market with a need to break through resistance to establish a new leg higher.

• Goldman Sachs published an interesting look at the top heavy and valuation premium nature of the larger names in the S&P 500 suggesting the concentration factor has further to fall but valuation premium has largely been re-priced away.

• Holdings data from Goldman also revealed similarities (industrials, healthcare, materials) and differences (financials) between hedge fund and mutual fund complexes.

• The November ISM Services index registered 56.5, higher than the consensus estimate (53.5) and above the high end of the range (51.5-56.0)
• UofM Consumer Sentiment for December registered 59.1, above the consensus estimate of 56.8 and toward the high end of the range (54.0-60.5).
• JP Morgan Global Composite (48.0) and Services (48.1) PMIs decreased sequentially over prior month levels.

Last week put November officially in the rearview mirror with market narratives centered around generational protests in China, visibility on Fed monetary policy, and a very busy economic calendar. The S&P 500 booked a second consecutive monthly gain coming off the September lows, adding another 1% last week. Non-U.S. developed (+1.65%) and emerging (+4.7%) markets benefited from a soft USD and a 12% surge in Chinese stocks as government officials assess country wide Covid policy protests. Interest rates fell again last week with the 10yr settling back at 3.51%, well below the 4.25% level in late October while the yield curve dipped deeper into inversion territory with the 3m/10yr moving from -63bps to -83bps and the 2yr/10yr staying at -77bps.

• The WSJ added another anecdote to growth stock struggles this year, noting we haven’t seen DJIA (-5.3%) excess relative performance over the S&P 500 (-15%) and NASDAQ (-27%) to this extent in almost 90 years (1933) with index construction and P/E multiple compression and the primary culprits. Cheapness of non-U.S. equities relative to the U.S. remains at extreme levels.

• Given slowing growth forecasts and profit margin pressures, it’s no surprise we’ve seen analysts reducing 4Q and 2023 earnings estimates but reduced earnings estimates against a rally in stock prices (Oct/Nov) has taken the fwd P/E multiple from 15.2x to 17.6x since September 30.

• The peak inflation narrative and associated monetary policy indications have translated to strong equity/bond market recoveries and a declining USD while the sharp decline in longer-term interest rates and degree of yield curve inversion are signaling growth concerns in later 2023.

• Chair Powell’s speech on Wednesday validated market pricing of a 50bps hike at the December FOMC and likely another 50 bps in February. Markets are now pricing only a 9% probability for 75 bps hike in February and have similar probabilities assigned to 25 bps and 50 bps.

• The new set of FOMC voting members set for the January 31 meeting look like a dovish to moderate group with the tricky task of tackling inflation by assessing data trends across the labor market, rent inflation, wage inflation, and supply chain normalization.

• Equity market volatility ticked higher in reaction to the protests underway in China last weekend and week but comments from Xi Jinping signaled an openness to evaluating China’s zero tolerance Covid policies with any relaxation likely to be a very bumpy process.

• November payrolls of 263,000 came in well above consensus estimates of 200,000, near the high end of the range and the unemployment rate remained at 3.7%. Labor market participation declined two ticks to 62.1% and average hourly earnings (MoM 0.6% vs 0.3%) came in hot.

• The October JOLTS report showed job openings falling further than expected (10.334mm vs 10.5mm) and down notably from the prior month reading of 10.687mm.

• The October PIO report revealed YoY headline and core inflation of 6.0% vs 6.0% and 5.0% vs 5.0% alongside MoM readings of 0.3% vs 0.4% and 0.2% vs 0.3%.

• The October PIO report showed strong Personal Consumption Expenditures (0.8% vs 0.8%) and accelerating Personal Income growth of (0.7% vs 0.4%).

• November’s ISM Manufacturing Index came in slightly below forecasts and dipped into contractionary territory (49.3a vs 49.9e). S&P Global PMI declined 2.7 points to 47.7.

• The September Case-Shiller Home Price Index came in around consensus estimates for the MoM (-1.2% vs -1.2%) and YoY (10.4% vs 10.9%).

• Pending Home Sales in October fell slightly less than expected (-4.6% vs -5.0%).

• November Consumer Confidence registered 100.2 versus consensus estimate of 100.0.

Markets delivered the typical ultra-low volume week with the Thanksgiving holiday and the corresponding 3 1⁄2-day week. Drivers during the week included several energy market anecdotes, Chinese zero Covid policy angst, and a modest economic calendar. The S&P 500 managed to post a respectable gain of 1.5% aided again by another decline in interest rates which fell for all maturities two years and out while short rates edged slightly higher (flattener). Commodity markets fell again last week with oil trading below $80 for the first time since a brief spell in late September while the USD weakened against most major currencies.

• In a year of double-digit ups and downs, the S&P 500 last week marked a new high in this most recent rally. Technicals are somewhat encouraging and falling credit spreads have confirmed this recent equity market move while interest rate sensitive sectors have been outperforming.

• The yield curve flattened further last week which has now been inverted (3m/10yr) for over 10 consecutive days – a duration which carries an eight-for-eight track record over the last 50+ years in predicting recession.

• Headline CPI peaked at 9.1% in March, and it is currently at 7.7%. Core CPI peaked at 6.6% in September and is currently 6.3. Yes, the hard data and soft evidence clearly support a peak inflation in the rearview mirror case.

• FOMC meeting minutes reinforced the view that the pace of Fed tightening will slow in December and pause sometime in Q1 or Q2 of next year.

• The BCA Li Keqiang Leading Indicator illustrates why keeping hopeful expectations in check regarding a Chinese stimulus driven recovery is our base case. Not since the 2012 and 2015 downturns have Chinese policymakers responded relatively aggressively.

• Given last week’s large U.S. Treasury debt issuance and the FOMC sitting out of the September/October auctions, it’s interesting to revisit the composition and trends of the buyers showing up.

• November U.S. PMIs (C, M, S) of 45.3, 47.6, 46.1 slid a little deeper into contraction territory and fell short of consensus estimates. Eurozone PMIs of 47.8, 47.3, 48.6 improved slightly and surpassed expectations.
• October Durable Goods Orders exceeded expectations on the headline (1.0% vs 0.4%), ex-transportation (0.5% vs 0.1%), and core capital goods (0.7% vs 0.2%).
• October New Home Sales of 632k came in above the consensus range and point estimate of 575k.
• The final revision on U of M Consumer Sentiment at 56.8 came in above the consensus range and point estimate of 55.