Market Note – March 7, 2023

By Hightower Great Lakes on March 7, 2023

Hot Inflation Readings

The U.S. Bureau of Labor Statistics reported final unit labor costs increased +3.2% q/q annualized in the fourth quarter, double the expectations.

This hot, labor-driven inflation reading follows January core PCE rising +7.1% annualized and January CPI services ex-housing rising +6.9% annualized. The Fed pays close attention to these inflation measures and tight labor conditions continue to drive elevated prices.

Chart 1: Unit Labor Costs Remain at an Elevated Pace, Pressuring Services Inflation¹

The Fed has a dual mandate, which includes maximum employment and price stability. Because unemployment rate remains historically low, the Fed is aggressively pursuing its attack on inflation. The recent action in bond markets reflects an expectation for continued rate hikes.

10-Year Treasury Yield Above 4%

Last week’s main event was the 10-year treasury yield briefly passing the 4% mark for the first time since last November. Stubborn inflation along with an increasingly hawkish Federal Reserve are both pushing the yield higher. Fed Governor Christopher J. Waller cited rates may need to exceed the anticipated levels if hiring and consumer spending remain robust, so hotter JOLTS (job openings) and initial jobless claims coming out later this week will be scrutinized.

Higher yields are causing quite a commotion, as excitement surrounding bonds is the highest in more than a decade. Meanwhile, the somewhat forgotten 2s/10s spread remains near its widest mark, -90 bps, since inverting last July.

Retail Stability, Services Expansion

The supply chain volatility and shifting demand, which created a challenging inventory environment for retailers, has stabilized. Retailers have battled supply shortages since the pandemic.

Last year, retailers reported inventory surplus in stay-at-home categories as a result of double- and triple-ordering. Lower commodity costs and lower spot shipping contracts indicate a more sustainable supply chain environment and potentially better profitability for retailers.

Retailers that can execute more efficient inventory levels are set up for potential margin expansion if demand can stay strong. So far, economic activity has remained healthy – driven by the U.S. consumer and reflected in leading indicators like February’s ISM Services PMI expansion, which included the highest monthly new orders expansion since November 2021.

The Atlanta Fed’s GDPNow model is forecasting +2.3% q/q GDP growth in the current quarter. Strong services activity is balanced by softer manufacturing activity, yet services represent nearly 80% of U.S. GDP. There is no evidence for a current recessionary environment.

China GDP Target +5% in 2023

China is following the same playbook as many company CEOs by offering conservative guidance. Beijing announced a +5% GDP growth target for 2023. This represents a step up from China’s +2% GDP in 2022. China’s economic growth is heavily tied to its export demand, supported by U.S. and global consumption, and its property market, which continues to face investment headwinds.

While central banks are tightening financial conditions globally, China’s central bank has signaled a stable policy, following the recent period of interest rate cuts. Price stability is China’s priority and China’s central bank Governor Yi Gang recently indicated that real interest rates are at a relatively appropriate level.

Many U.S. multi-nationals are executing a strategic bet on China and reporting that China’s economic activity is showing strength. Many of these companies are consumer-facing and China’s massive consumer market is a long-term bet.

Earlier this month, Starbucks’ (SBUX) CEO Howard Schultz shared, “I remain more confident than ever that we are still only in the early chapters of our growth story in China.”

The Week Ahead

Earnings – Thursday: ULTA.

Economics – Wednesday: JOLTS Job Openings (February). Friday: Nonfarm Payrolls (February), Unemployment Rate (February), Hourly Earnings (February)

Return for Selected Indices²

Click here to read last week’s Market Note (2/28).

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: Bloomberg. As of March 5, 2023.

² Source: FactSet (chart). As of March 6, 2023.