After a strong week, equities were up across the board, and light was starting to shine at the end of the tunnel. Thursday was the day everyone was waiting for as the Bureau of Labor & Statistics (BLS) reported December inflation numbers. On the surface, everything seemed as expected, with headline inflation up 6.5% year-over-year (-0.1% MoM) and core inflation up 5.7% year-over-year (+0.3% MoM). Headline inflation was the lowest reading since October 2021. While the continued inflation decline is encouraging, some details below the topline numbers made the report even better. As may be expected, shelter costs significantly impact Core inflation, making up almost 40% of the total. In addition, the shelter component lags current market conditions by about one year. Due to this, shelter is having an outsized impact on Core inflation, accounting for 4.4 points of the 5.7% increase. Said another way, as the shelter component reflects current market conditions, Core inflation will begin to decline significantly. And while inflation could always re-accelerate due to unknown global events, the last few months have shown broad disinflationary pressure, which is definitely a good thing.
As we stated last week, we’ll spend some time discussing behavioral finance throughout the year. This week, the focus will be on recency bias, which is particularly important to understand after such a tough year. Recency bias is a cognitive error identified in behavioral economics whereby people incorrectly give more weight to recent events, believing they will occur again soon. This tendency is irrational, obscuring the actual or objective probabilities of events occurring and leading people to make poor decisions. To read more about recency bias, click here.
Economy
- The U.S. equity markets ended higher for the week ending January 13, with the S&P 500 up four days in a row to close the week. All eyes were on Thursday’s CPI report, which while in line with expectations, had plenty of good news below the surface.
- The annual inflation rate in the U.S. slowed for a sixth straight month to 6.5% in December of 2022, the lowest since October of 2021, in line with market forecasts. It follows a 7.1% reading in November. Energy costs increased 7.3%, well below 13.1% in November, as gasoline costs dropped 1.5%, following a 10.1% surge in November. A slowdown was also seen in food prices (10.4% vs. 10.6%), while the cost of used cars and trucks continued to decline (-8.8% vs. -3.3%). On the other hand, the cost of shelter increased faster (7.5% vs. 7.1%).
- Compared to the previous month, CPI edged 0.1% lower, the first decline since May 2020. Inflation peaked at 9.1% in June 2022 but remained more than three times above the Fed’s 2% target.
- The number of Americans filing new claims for unemployment benefits fell by 1,000 to 205,000 on the week ending January 7, well below expectations of 215,000. It was the lowest value over three months, adding to recent evidence of a tight labor market despite the Federal Reserve’s aggressive tightening path last year. The 4-week moving average fell by 1,750 to 212,500.
- The average contract interest rate for 30-year fixed-rate mortgages fell by 16bps to 6.42% in the first week of January 2023 from 6.58% in the last week of 2022, which was close to 2001-highs seen at the beginning of November, data from the Mortgage Bankers Association (MBA) showed. “Mortgage rates declined last week as markets reacted to data showing a weakening economy and slowing wage growth. All loan types in the survey saw a decline in rates,” said Joel Kan, an MBA economist.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Technology were the top performers, while Consumer Staples and Healthcare lagged. Growth stocks led value stocks and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 6 basis points to 3.51% during the week.
- Global bond markets were in positive territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
