Markets last week digested several 4Q earnings calls, a rather busy economic calendar, and an outsized dose of central bank policy speaking engagements from the Fed and ECB. A nice rally on Friday largely offset a fair amount of mid-week selling pressure to leave the S&P 500 down less than 1% on the week, +3.5% in January. Developed (+1.2%) and emerging (+1.7%) equity markets both managed respectable gains aided in part by a weaker USD. Interest rates were slightly lower with 10 yr yields largely unchanged while 2 yr yields fell 8bps to yield 4.14%. Commodity markets were up 1.7% aided by a strong rally in industrial metals and WTI oil closing up 1.8% to close back above $80, a level it hasn’t been able to sustain since mid-November.

• While U.S. equity market trends have yet to break out of a well-established downtrend, international equity markets are exhibiting something different with Europe breaking out in November and the MSCI ACWI ex/US seeing its 50 dma crossing through its 200 dma last week.

• Early (11% reported) 4Q earnings reports aren’t off to a great start with beat rates and magnitudes both below average and earnings contraction of -4.6% and revenue growth of 3.7%.

• Coming off the back of two consecutive losing years in the bond market, yields have fallen in sympathy with falling inflation to begin 2023.

• Wage growth is slowing, disinflation is prevailing, and employment has remained strong but, while great for now, these are not equilibrium trends we can expect indefinitely with demand driven inflation later in 2023 a key focus on the part of policy makers.

• Very hawkish ECB meeting minutes and eight Fed speaking engagements, where officials echoed hawkish remarks, set a clear monetary policy tone, one that is at odds with market expectations.

• While labor market resilience feels contrary to layoff announcements in the technology and banking sectors, their size relative to leisure and hospitality may explain the divergence.

• The Beveridge Curve which illustrates a tight inverse relationship between job vacancies and unemployment may be the most important factor to monitor in 2023 as to whether tight labor markets can be loosened by reducing vacancies rather than increasing unemployment.

• It is likely the looming February 5 EU embargo on Russian refined product imports will lead to larger trade dislocations because, unlike Russian crude oil, which India and China happily absorbed, they are both net exporters of refined product.

• The need for some form of accommodation in China is supported given annual GDP slowed from 8.4% in 2021 to 3.0% in 2022 and q/q GDP slowed from 3.9% in Q3 to 0.0% in Q4 (3.9% y/y to 2.9% y/y).

• 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).

• December Retail Sales missed expectations for headline (-1.1% vs -0.8%), ex-vehicles (-1.1% vs -0.5%), and ex-vehicles & gas (-0.7% vs -0.1%).

• Weekly jobless claims fell to 190k, lower than the consensus call for a slight increase, pulling the 4-week moving average to an eight-month low of 206k.

• Industrial Production in December came in below expectations for headline (-0.7% vs -0.1%) and manufacturing output (-1.3% vs -0.2%).

• Regional Fed manufacturing indices for Philly (-8.9) and Empire State (-32.9) both registered well into contractionary territory.

• January’s Housing Market Index registered 35, ahead of consensus and above the high end of the range.

• Housing Starts (1.382MM) and Permits (1.330MM) for December registered in the middle of their expected ranges, slightly above and below their spot estimates respectively.

• Existing Home Sales for December fell 1.5%MoM and 34%YoY, registering 4.02MM, slightly ahead of consensus estimates.

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 near- term 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 2 yr 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.

• 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.

Markets started off the new year with a dose of optimism fueled primarily by the economic calendar, Chinese mobility/policy support, and related monetary policy implications. The jobs report on Friday sent equity markets sharply higher and bond yields lower on the back of a friendly mix of robust job creation and moderating wage growth. U.S. equity markets closed up 1.5% for the week while developed international and emerging markets were up 2.7% and 4.3%, respectively. Bond yields fell sharply taking the 10 yr UST to 3.55% while the curve steepened as well. Commodities fell nearly 6% thanks to an 8% decline in crude oil.

• 2022 left the S&P down 18%, due primarily to multiple compression, closing with a P/E multiple of 16.7x, a valuation almost exactly at the 25-year average.

• A painful look back at 2022 shows the Barclays Aggregate Index down 13%, the worst return on record by a factor of 4x, a significant contributing factor to the third worst outcome for a 60/40 portfolio since 1950.

• A strong consumer underpins most bullish/constructive views looking into 2023 – a view bolstered by consumer balance sheets, savings, debt service, and the healthy job market.

• Real personal disposable income grew in the back half of 2022 after declining for five consecutive quarters – a strong potential bullish tailwind for 2023.

• With ISM Services and Manufacturing Indexes both falling below 50 for November, a reminder of the predictive nature and efficacy warrants consideration.

• Freight indices and global PMI survey responses on delivery times and input/output prices continue to illustrate healing supply chains and relaxed pricing pressures. Regardless, Fed officials hit the speaking circuit last week and clearly maintained the higher for longer narrative.

• A look at high yield and bank loan maturities show relatively light refinancing needs over the next two years but a considerably higher level in 2025 and 2026.

• BCA suggested most Chinese tier-1 cities have passed peak Covid infections with the remaining areas tick higher and an expectation of return to normalcy sometime later this spring (March).

• Declines in global trade data of small open economies, (Singapore -14%, Taiwan -23.4%) a bellwether for global trade and manufacturing activity, are flashing caution with China reopening, normalizing consumption patterns, and slowing global growth are all contributing.

• The December jobs report came in stronger than consensus with higher job creation (223,000 vs 200,000) and lower headline unemployment (3.5% vs 3.7%). Labor force participation ticked higher from 62.2% to 62.3%.

• Average hourly earnings growth in December came in below consensus for both MoM (0.3% vs 0.4%) and YoY (4.6% vs 5.0%) readings.

• The November JOLT survey registered 10.458mm job openings, higher than the consensus spot forecast of 10.1mm and above the high end of estimate range of 10.00mm-10.33mm.

• The November ISM Manufacturing Index came in at 48.4, a second consecutive decline but slightly higher than consensus forecast of 48.1 and within the estimated range of 47.5 – 49.0.

• November ISM Services Index surprisingly came in well below consensus estimate (49.6 vs 55.0) and dipped into contraction territory.

• November’s J.P. Morgan Global Manufacturing PMI registered 48.6, down slightly from the prior month reading of 48.8.

Last week’s Christmas holiday shortened trading week put a bow on the month of December and the year 2022, a year most investors would rather forget. Marked by thin trading volumes and a very light economic calendar, all global equity markets finished the week relatively flat. The S&P 500 closed the month down 5.9%, registering its worst annual return (-18.11%) since 2008, while developed international markets weathered December much better (+0.1%) and finished the year outperforming U.S. markets by losing less (- 14.5%). Rising policy rates and market rates were the primary culprits for the damage levied on both stock and bond markets in 2022. Commodity markets were up slightly in the last week of trading (+0.71%), finishing 2022 up 13%. Interest rates moved higher and steeper for a second consecutive week, bringing the 10 yr UST yield to close the year at 3.88%, up sharply from 2021 closing yield of 1.52%.

• Putting 2022 in the rearview mirror couldn’t happen soon enough in terms of investment returns for stocks and bonds as the former ranked among the worst and the latter the absolute worst on record.

• An LPL graphic of the policy driven stock market bounce off Covid lows in February 2020 illustrates how front loaded the market recovery was and possibly why the give back in 2022 was also very pronounced.

• A look at the major developed market economies and central bank balance sheets illustrates the top-heavy nature of the global economy and the beginnings of central bank balance sheet reduction. Central bank policy rate hikes were also very clearly a coordinated global initiative.

• GSIR parroted the BCA thesis of increasing real income driving above trend consumption in later 2023 leading to a resumption of potentially inflationary pressures, this time demand driven.

• An important consideration looking into 2023 is how central a Chinese rebound is to the consensus views of a rebound in raw commodities, including oil and increasing finished goods production serving to further dampen inflation.

• Policy highlights included a Russian ban on oil sales to countries adopting the price cap on Russian oil, a HOR ban on TikTok, Putin-Xi discussions, POTUS signed omnibus spending package, and a SCOTUS ruling on Title 42.

• Arbor Data Science charted the annual release of Google search trends, revealing a surprising absence of economic or financial market related searches. Not surprisingly, 2022 trends were dominated by searches for ‘shortages’ of various products including sriracha, baby formula, tampons, diesel, and adderall.

• October’s Case-Shiller Home Price Index registered -0.5% MoM and +8.6% YoY price changes, both ahead of the spot forecast and within the consensus range respectively.
• Pending Home Sales for November fell 4%, below the spot forecast of -0.5% and the low end of the range.

• 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.