Hey everyone, markets showing positive momentum as we move thru the end of January leading up to the Feb 1st FED Policy and Interest rate decision. Get my take on where to from here.
WEEKLY SOUND BITES:
Major US indexes ended mixed for this holiday shortened week as Monday was closed in observance for MLK Day. However, we are seeing Gold/precious metals are outpacing the S&P since the Oct lows being up 14.6% vs S&P up 11.8% having advanced in 10 out of the past 12 weeks. This is the first time in 50 years Gold has led the S&P when coming off a market low.
The week brought several additional signals that the economy was slowing significantly following the Federal Reserve’s aggressive rate hikes in 2022. Most notable may have been Wednesday’s report of a 1.1% drop in retail sales in December. The upside of the weakening economy for investors was declining inflation pressures. The Labor Department reported PPI fell 0.5% in December, the biggest drop since early in the pandemic, as prices companies paid for goods, food, and especially energy all recorded declines. The week also brought news that industrial production fell by 0.7% in December, the most since September 2021, driven by a 1.3% drop in manufacturing output. For the fourth quarter, the industrial sector of the economy contracted at an annualized rate of 1.7%. The job market remained unusually tight in this environment, however, with weekly jobless claims falling to their lowest level since April 2022. Housing starts and existing home sales also fell a bit less than expected.
U.S. Treasuries posted positive returns as the yield on the benchmark 10-year note fell to its lowest intraday level in over four months before rising to end the week. The BoJ’s commitment to yield curve control helped a rally in Treasuries on Wednesday. And the FED Funds Futures markets put a 25 bps at over 98% on Feb 1st. In addition, the markets anticipate another 25 bps in March before the FEDs will be forced to take the then current rate of 4.75-5% down in the Nov/Dec ’23 time frame. In contrast the FEDs see the rates running up to 5.1% by end of ’23 and holding for a longer period of time than the markets anticipate. Meanwhile QT, which started last May has taken over $406 Billion off the US Balance Sheet.
In Europe, ECB President Christine “Queen Bee” Lagarde dismissed market speculation that a fall in energy prices would allow policymakers to slow the pace of monetary policy tightening. She said: “I would invite [financial markets] to revise their position; they would be well advised to do so.” The minutes of the ECB’s December meeting also suggested that forthcoming rate hikes might be higher. UK inflation slowed for a second consecutive month in December 2022. Lower gasoline prices were a key driver. The consumer price index (CPI) slipped to 10.5% from November’s 10.7% reading, according to the Office for National Statistics.
Stock markets in Japan rose over the week as sentiment was supported by the prospect of China’s reopening boosting the global economy and hopes that the major central banks would slow the pace of their rate hikes amid some signs of waning inflationary pressures. Investors’ focus was on the Bank of Japan (BoJ), which left its monetary policy unchanged at its January meeting, having surprised markets in December by tweaking its yield curve control (YCC) framework. Japan’s core CPI rose 4% year on year in December, a 41-year high, as companies passed rising costs onto consumers. Producer prices also surged over the same period. Prime Minister Fumio Kishida said that the legal status of COVID could be downgraded this spring to the same level as seasonal influenza.
Chinese equities rallied for a fourth consecutive week ahead of a weeklong holiday following reports indicating better-than-expected economic growth. China’s GDP rose 2.9% in the fourth quarter of 2022 and expanded 3.0% for the full year. The annual growth pace missed the official target of around 5.5% set last March and marked the second-worst year for economic growth after a pandemic-hit 2020 since 1976, the end of China’s decade-long Cultural Revolution. For 2023, economists predict that China’s economy will recover close to 5% as infections subside and domestic demand accelerates. Many analysts predict that the PBOC will resume easing measures in the near term after the central bank pledged in December to support a recovery in consumption. Analysts polled by Reuters forecast that property sales in China would decline in 2023 for the second straight year but to a smaller extent compared with the 5.1% drop in 2022 amid an expected recovery in economic activity later this year.
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