Market Note – January 30, 2023

By Hightower Great Lakes on January 30, 2023

Year End Economic Data Encouraging

Last week’s economic data offered measured optimism around U.S. economic conditions. There continue to be pockets of strength and weakness, but total economic growth remains resolute. Q4 GDP expanded +2.9% q/q.

The Fed’s preferred inflation measure, Core PCE, was up +4.4% y/y in December – its slowest one-year pace since October 2021 and the slowest 3-month annualized rate since 2020. Keep in mind, however, that the Fed’s Core PCE target is +2%, so there is still a ways to go.

Chart 1: Slowing Pace of Inflation and Stable GDP Growth¹

Lower inflation is positive for consumers, who have also benefitted from a strong jobs market and higher wages. We’re mindful of layoffs, which are beginning to expand outside of the technology sector. We don’t anticipate the jobs market to remain this tight for much longer, but we don’t expect a collapse.

Although the Fed has indicated for a while now that they expect “pain” in the labor market, the unemployment rate remains near historic lows (3.5%), job openings are well-above pre-pandemic levels, wages continue to increase and the personal savings rate continued to rebound in December to 3.4% – the highest savings rate since May.

Chart 2: Consumer Savings Rate Rebounding, Wages Continue Rising at Slower Pace³

Chart 3: Consumers Spending Above Trend, Savings Begin to Rebound⁴

Personal savings were depleted from elevated pandemic-levels during the extended period of pent-up demand but are now normalizing.

Better savings levels and savings rates since September lows can be tied to the strength in the jobs market and better inflation data. Overall, the consumer is in much better shape with real income rising. The consumer represents 70% of U.S. GDP.

December’s 2.9% q/q GDP expansion was better than most expectations. In addition, the inflation component of GDP was +2.1% (much lower than expected). Services pricing continues to drive inflation, as stickier components like rents and wages remain tight.

Chart 4: Services and Manufacturing Activity Slowing; Services Inflation Still Expanding, Goods Contracting⁵

So far, the contraction in goods/commodity prices has driven the slowdown in inflation. As the labor market becomes more widely affected by the monetary policy – slower pace of wage growth, contracting ISM surveys – services inflation might ease.

Overall low unemployment and higher income will continue to drive economic activity. Pending home sales increased in December – the first monthly increase since May.

December data showed some indications of a trough environment in housing activity. Housing markets have certainly been a soft spot for the economy, and better housing activity has a tremendous multiplier purchasing effect (e.g., furniture, appliances, cars).

The U.S. economy continues to expand, global economies are also reporting better-than-expected conditions, inflation is slowing and employment/wages are high. We’re encouraged by the year-end economic data. Whether or not the Fed can avoid a recession, we’re closing in on a peak fed funds rate.

Fed Meeting Next Week, Expecting 25 bps Rate Hike

The Fed has hiked 425 bps in the last 10 months, the fastest pace in five decades. The Fed is close to the end of rate hikes and markets anticipate a 25 bps hike during this week’s FOMC meeting. Hopefully soon, a pause in future policy decisions will allow the Fed to assess conditions.

A 25 bps hike will register much smaller on the Richter scale, following their four-consecutive 75 bps hikes and December 50 bps rate hike. The Fed has held the spotlight for the past three years and we may be finally entering a “more boring” period. Even if January isn’t the last Fed hike, we’ve reached a much slower pace.

Fixed Income Yield Curve Reflecting Lack of Supply

Securities trading in fixed income markets are pricing lower rates and a sharply inverted yield curve, in part, due to the lack in supply. Limited supply creates higher prices and lower yields. Supply will start to come back online in the second half as issuers figure out where rates stabilize and gain better visibility on economic growth.

We’re looking for the Fed to leave breadcrumbs in this week’s FOMC meeting – possibly indicating a future pause or satisfaction with recent trends.

The Week Ahead

Earnings – Monday: GEHC. Tuesday: CAT, MCD, XOM, UPS, PFE, GM. Wednesday: META, OTIS, ODFL, MCK, ABC. Thursday: GOOG, AAPL, AMZN, SBUX, HSY, HON, EL, LLY, QCOM, F.

Economics – Tuesday: Employment Cost Index (Q4), Consumer Confidence (January). Wednesday: JOLTS Job Openings (December), FOMC Meeting, ISM Manufacturing PMI (January). Thursday: Unit Labor Costs (Q4). Friday: Nonfarm Payrolls (January), Unemployment Rate (January), ISM Services PMI (January).

Return for Selected Indices⁶

Click here to read last week’s Market Note (1/23).

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.

---

¹ Source: FactSet (chart). As of January 28, 2023.

² Source1: FactSet (chart). As of January 28, 2023.

³ Source: FactSet (chart). As of January 28, 2023.

⁴ Source: Bloomberg. As of January 28, 2022.

⁵ Source: Bloomberg. As of January 28, 2022.

⁶ Source: Bloomberg. As of January 28, 2022.