It was another strong week for equity markets, driven higher by strength in the Technology sector, among others. Market participants finally heard what they wanted from the Federal Reserve, as they gave signs that further interest rate increases are becoming less likely. The NASDAQ Composite index is now up almost +15% year-to-date, an absolutely staggering run in just over a month, but this comes after losing 1/3 of its value last year. The S&P 500 notched another winning week to push year-to-date returns almost to +8%. After such a tough year in 2022, it is undoubtedly a welcome change of pace to start 2023.
The week’s biggest news came from the Q&A session with Fed Chair Jerome Powell after the Federal Reserve said they would raise interest rates by another quarter point. While the initial reaction to the policy statement was muted, a few responses from Chair Powell led the market to believe the end of the interest rate hiking cycle may be coming to a close. Specifically, Chair Powell stated, “We have no incentive and no desire to overtighten” and “We can now say that the disinflationary process has started.” Both of these comments have given equity markets a boost. The acknowledgment illustrates that the Fed is seeing the inflation data improve and that they understand the gravity of the potential impact of too many rate increases. Given the current tone, futures markets are now pricing in only one more 25 basis point increase, which would bring the Fed Funds rate to 5.00%. While no one knows the Fed’s path, it is clear that markets are pricing in a more dovish scenario, so any deviation from that path could lead to a pullback in equities. And it didn’t take long to see what that might look like, as the Non-Farm Payroll report on Friday was considerably better than expected, leading to another volatile down day. Markets continue to see the strong jobs market as a potential reason the Fed will keep rates higher for longer.
Economy
- The U.S. equity markets surged higher for the week ending February 3, with the S&P 500 up 1.6% and the tech-heavy Nasdaq up 3.3%. The Federal Reserve raised rates by 25 basis points as expected, but the slightly more dovish tone drove markets higher.
- The Federal Reserve raised the target range for the fed funds rate to 4.5%-4.75% in its February 2023 meeting. This was the second straight meeting they dialed back the increase; however, it still pushed borrowing costs to the highest level since 2007. Policymakers added that ongoing increases in the target range would be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%.
- The unemployment rate in the U.S. inched lower to 3.4 percent in January 2023, the lowest level since May 1969 and below market expectations of 3.6 percent, as the number of unemployed people declined by 28 thousand to 5.69 million. In addition, the U.S. economy unexpectedly created 517K jobs in January, the most since July, and well above an average monthly gain of 401K in 2022, beating market forecasts of 185K. Job growth was widespread in January, led by gains in leisure and hospitality (128K), professional and business services (82K), and health care (58K).
- The January read from ISM Manufacturing PMI fell to 47.4, the lowest since May 2020 at the height of the covid pandemic and below market forecasts of 48. This was the third consecutive contraction in factory activity as companies slowed outputs to better match demand in 1H 2023 and prepare for growth in the year’s second half. In addition, there were further declines in new orders (42.5 vs. 45.1), production (48 vs. 48.6), and backlogs of orders (43.4 vs. 41.4)
- Job openings in the U.S. increased to 11.0 million in December 2022, the most in 5 months and well ahead of market expectations of 10.25 million. Over the month, the most significant additions came from accommodation and food services (+409,000), retail trade (+134,000), and construction (+82,000). These numbers hardly indicate an impending recession as the jobs market continues to show resiliency.
Stocks
- U.S. equities were in positive territory. Communication Services and Technology were the top performers, while Energy and Utilities lagged. Growth stocks led value stocks and small caps beat large caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 1 basis points to 3.53% 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.
