It was another wild week for equity markets, down about 2% from last Friday, with multiple newsworthy stories sprinkled throughout. On Tuesday, the CPI report was much better than expected, shooting equities immediately higher. However, that didn’t last, as gains tapered off throughout the day as investors looked forward to the Federal Reserve meeting. On Wednesday, the Fed increased rates by 50 basis points, the seventh rate hike this year. The target rate is now 4.25% to 4.50%, which has reached the highest point in 15 years. In addition to the rate hike, Fed Chair Jerome Powell took a more hawkish tone in his press conference, and this rhetoric is what continues to give the markets pause for concern. Will the Fed take a step back to assess the tightening that has already occurred and the impact on the economy, or are they blinded by their mission to reduce inflation and loosen the job market at all costs? Only time will tell, as you must take the comments from the Fed with a grain of salt. It was only March last year that 14 of 18 Fed officials predicted ZERO interest rate increases in 2022. Needless to say, situations change over time, but hopefully Fed officials will take a deep breath and evaluate all they have already done.
Economy
- The U.S. equity market lost ground during the week ending December 16, with considerable volatility around economic data releases. We received great data from the CPI report early in the week, however, this was offset by a hawkish Fed and disappointing retail sales for the month of November.
- The annual inflation rate in the US slowed for a fifth straight month to 7.1% in November of 2022, the lowest since December last year, and below forecasts of 7.3%. It follows a reading of 7.7% in October. Energy cost increased 13.1%, below 17.6% in October, due to gasoline (10.1% vs 17.5%), fuel oil (65.7% vs 68.5%), and electricity (13.7% vs 14.1%). A slowdown was also seen in food prices (10.6% vs 10.9%) while prices of used cars and trucks declined by 3.3% (after a 2% rise in October).
- US core consumer prices, which exclude volatile items such as food and energy, went up by 0.2% from a month earlier in November of 2022, down slightly from a 0.3% rise in the prior month and below market estimates of a 0.3% increase. It was the smallest increase in core consumer prices since August of 2021. The indexes for shelter, communication, recreation, motor vehicle insurance, education, and apparel were among those that increased over the month, while the indexes for used cars and trucks, medical care, and airline fares declined. Year-on-year, core consumer prices advanced 6.0% in November of 2022, slowing from a 6.3% increase in October and below market estimates of a 6.1% rise.
- The Federal Reserve raised the fed funds rate by 50bps to 4.25%-4.5% during its last monetary policy meeting of 2022, pushing borrowing costs to the highest level since 2007, and in line with market expectations. It was a seventh consecutive rate hike, following four straight three-quarter point increases. Policymakers reinforced that ongoing hikes in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%. The Fed now expects interest rates to reach 5.1% next year, 4.1% in 2024, and 3.1% in 2025, a higher level than previously indicated.
- Retail sales in the US declined 0.6% month-over-month in November of 2022, much worse than market forecasts of a 0.1% fall. It is the biggest drop so far this year, with sales of furniture (-2.6%), building materials (-2.5%) and motor vehicles (-2.3%) falling the most during the holiday season. Other decreases were also seen at electronics stores (-1.5%), non-store retailers (-0.9%), sporting goods, hobby, musical instruments and books (-0.6%), gasoline stations (-0.1%) and general merchandise stores (-0.1%). In contrast, increases were seen in sales at food services and drinking places (0.9%), food and beverage stores (0.8%), health and personal care stores (0.7%) and miscellaneous retailers (0.5%). Data for November which includes the Black Friday and the Cyber Monday during which big discounts are offered, point to a slowdown in consumer spending amid high inflation and interest rates.
Stocks
- U.S. equities were in negative territory. Consumer Discretionary and Communication Services led the decline, while Energy and Utilities outperformed. Value stocks led growth stocks and small caps beat large caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 9 basis points to 3.48% during the week.
- U.S. bond markets were in positive territory this week while International bond markets were negative.
- Government bonds led for the week, followed by corporate bonds and high yield bonds.
