Market Note – February 28, 2023

By Hightower Great Lakes on February 28, 2023

Economy Still Buzzing

GDP increased +2.7% in 4Q22, and the Atlanta Fed GDPNow model predicts +2.5% economic growth in the current quarter. Weekly initial claims for unemployment insurance remain below 200,000 for the sixth consecutive week and the four-week moving average is down -6% y/y.

Services still remains the bright spot in the economy. ISM Services leading indicator survey was back in expansionary territory in January and Markit’s preliminary composite PMI for February also indicated overall economic expansion.

Later this week, we receive final February PMI data, which acts as a leading economic indicator, and expect continued momentum. Chicago Fed National Activity reported January as the first positive month in four months. Kansas City Fed Manufacturing and Michigan Sentiment for February both surprised to the upside.

Suffice to say that while macro uncertainty remains prevalent, the economy continues to beat to its own drum – supported by consumer spending and tight labor markets. This is a function of the enormous stimulus that has been put into the economy over the last year.

In fact, while M2 (money supply/liquidity) is down y/y, it is still north of $4 trillion pre-pandemic levels. It will eventually get worked down but for now the strong jobs market and liquidity levels are providing stronger consumer spending. Consumer is 70% of U.S. GDP.

Chart 1: Higher Income and Steady Employment Supports Consumer Spending¹

Consumer Strength Underscores Sticky Inflation Data

Consumer demand continues to drive elevated inflation. The GDP price deflator, which measures prices paid for personal spending, increased +3.9% sequentially in 4Q22 and +6.5% y/y. The Fed’s preferred inflation gauge, Core PCE, remained elevated +4.7% y/y in January. The Fed is seeking 2% inflation and has continued to emphasize a “higher for longer” policy to achieve a slower pace of inflation.

The cause for sticky and elevated inflation can be attributed to strong consumer spending and personal income. U.S. consumers’ spending increased +1.8% m/m in January, the largest monthly increase in nearly two years. Strong spending was reflected across both goods and services sectors.

Yield Curve Reflects the Fed Strengthening Its Hand

The Fed has continued to share a consistent message in their resolve to bring inflation back down to 2%. Excess stimulus throughout the pandemic continues to flow through the economy today – supporting tight labor, higher income and elevated savings.

This is Fed policy’s long and variable lag. The Fed became restrictive late last year, and there will be a long and variable lag until the current monetary policy fully impacts consumers and the economy.

The elevated yield curve reflects the Fed hiking and holding rates higher for longer, creating an income-generating opportunity for bondholders. The market shows that it wants lower rates, noted by the inverted yield curve, but the latest data and consistent narrative tells us that we’re probably going to have to wait. Waiting creates an opportunity to invest at today’s higher yields.

Yield Curve Movement

Last week’s move in rates was driven by the higher than anticipated PCE print (5.4% vs. 5% est.) and other inflation indicators like the GDP price deflator, and stubbornly high CPI/PPI at the core level.

The 2s/10s spread further decreased, nearing its widest mark at -87 bps as higher rates for longer is likely needed to expunge the sticky inflation.

The municipal curve remained mostly unchanged after the prior week’s surge in rates. High Yield credit spreads tightened moderately throughout the week, while Investment Grade was unchanged.

The Week Ahead

Earnings – Tuesday: TGT, OXY. Wednesday: DLTR, CRM, LOW. Thursday: AVGO, KR, HPE, COST.

Economics – Tuesday: Chicago PMI (February), Consumer Confidence (February). Wednesday: ISM Manufacturing (February). Friday: ISM Services PMI (February).

Return for Selected Indices²

Click here to read last week’s Market Note (2/14).

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of February 27, 2023.

² Source:  Bloomberg. As of February 26, 2023.