Last week felt more familiar, as U.S. equities were lower with volatility in full swing. Weakness in multiple economic indicators continues to point to a slowdown. The disappointing retail sales report on Wednesday was the beginning of noticeable declines in the equity markets, as the -1.1% MoM reading was well below consensus expectations. The decline was broad-based, as 10 of the 13 categories were negative, bringing the six-month retail sales diffusion index (a measure of the breadth of change in retail sales) to the lowest levels since the COVID lows. In addition to retail sales, there were weak reports from the NY Empire State manufacturing index (lowest reading since March 2020) and the Philadelphia Fed manufacturing index, which, while it improved slightly, was negative for the 7th time in the last eight months. On the bright side, the Producer Price Index (PPI) inflation measure came in well below expectations (-0.5% MoM vs. -0.1% consensus), yet another sign that inflation is moving in the right direction. In addition, weekly jobless claims declined to a 4-month low as the jobs market continues to show signs of life. Looking forward, it is clear the balance between inflation, economic performance, and Federal Reserve interest rate policy will be a primary driver of market movements.
Economy
- The U.S. equity markets ended lower for the week ending January 20, with the S&P 500 down three days in a row to start the week. Weakness in multiple economic reports was too much for markets to shake off, even with a significantly better-than-expected PPI number.
- Retail sales in the U.S. dropped 1.1% MoM in December 2022, following a 1% drop in November and worse than consensus forecasts of a 0.8% fall. Sales at gasoline stations recorded the most considerable declines (-4.6%), followed by furniture stores (-2.5%), automobile dealers (-1.2%), electronics and appliances stores (-1.1%), miscellaneous (-1.1%) and nonstore retailers (-1.1%).
- Producer prices for final demand in the U.S. dropped -0.5% MoM in December 2022, following a revised 0.2% gain in November and compared with market expectations of a 0.1% fall. It was the most significant monthly decline since April 2020, indicating that inflationary pressure in the world’s largest economy is cooling. Goods prices were down 1.6% , led by a 7.9% slump in energy cost and, to a lesser extent, a 1.2% fall in food prices.
- The NY Empire State Manufacturing Index sank to -32.9 in January of 2023, the lowest reading since May 2020, from -11.2 in December, and well below market forecasts of -9. The reading was the fifth worst contraction ever in business activity in the N.Y. state, as new orders (-31.1 vs. -3.6 in Dec ’22) and shipments (-22.4 vs. 5.3) declined substantially.
- New claims for unemployment benefits fell by 15k from the previous week to 190k on the week ending January 14. This was the lowest reading in four months and well below market expectations of 214k. The result further consolidated evidence of a tight labor market despite the Federal Reserve’s aggressive tightening path last year, challenging market bets that the Fed will halt its tightening path before reaching the forecasted terminal rate of 5.25%.
Stocks
- U.S. equities were in negative territory. Industrials and Utilities led the decline, while Communication Services and Energy outperformed. Growth stocks led value stocks and large caps beat small caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 3 basis points to 3.48% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high yield bonds.
