Last Week In Review
Last week the major benchmarks ended lower with relatively few critical economic releases or other concrete sentiment drivers. Sector performance was relatively uniform within the S&P 500 Index, with energy stocks being the notable upside outlier and communication services shares the noteworthy laggard. According to traders, a recent pattern of short covering—or the buying of certain stocks by hedge funds and others to cover previous bets that the shares would fall—was perceived by many as coming to an end.
The most significant stock-specific event for the broad benchmarks was a plunge in shares of Google parent Alphabet, which lost roughly USD 100 billion in market capitalization on Wednesday and fell approximately 10% for the week. The shares plunged after Reuters reported that Google’s new artificial intelligence (AI)-based chatbot, Bard, mistakenly identified the first satellite to take a picture of an exoplanet in its first public demonstration on Monday.
The recent debuts of rival chatbots, such as ChatGPT and Perplexity (neither of which are writing this update), have raised concerns for some investors about Google’s ability to maintain its dominance in internet search and AI. Microsoft has invested heavily in ChatGPT creator OpenAI and unveiled a prototype of the two companies’ combined search engine on Monday.
US – Markets & Economy
Statements from Federal Reserve officials appeared to send stocks in opposite directions on Tuesday and Wednesday. Stocks rallied Tuesday, after Fed Chair Jerome Powell, in a question-and-answer session at the Economic Club of Washington, repeated an earlier reference to the disinflation process has started. Some investors had worried that the significant upside surprise in the January payrolls report, released the previous Friday, might cause Powell to change his tone. However, traders noted that a series of apparently hawkish comments from other Fed officials the following day seemed to send stocks back lower.
After the previous Friday’s big surprises, the week’s light calendar of economic data came largely in line with consensus expectations. Weekly jobless claims were slightly higher than expected, at 196,000, but remained near recent nine-month lows. The University of Michigan’s preliminary gauge of February consumer sentiment, released Friday, moderately exceeded expectations and reached its highest level (66.4) since January 2022.
US – Equity Market Performance
|Index||Friday’s Close Week Ending 2/10/2023||Weekly (+/-) Point Change 2/10/2023||% Change YTD Week Ending 2/10/2023|
|S&P Midcap 400||2,639.30||-68.17||8.60%|
SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.
US Yields & Bonds
The yield on the benchmark 10-year U.S. Treasury note increased over the week as investors continued digesting the previous week’s strong January payrolls report. (Bond prices and yields move in opposite directions.) The yield curve inverted further—Bloomberg reported that two-year Treasury yields moved to their highest level over 10-year yields in four decades—as fears grew that the Fed would need to push the economy into recession to tame inflation.
While the tax-exempt market felt the downdraft in Treasuries, technical conditions remained generally favorable. While an uptick in new municipal issuance is expected in March, the primary calendar for the next few weeks looked manageable, and funds industrywide continued to receive inflows.
Conversely, investment-grade corporate bonds weakened relative to Treasuries alongside expectations of an active primary calendar. Recent new corporate issues that had begun trading in the secondary market underperformed early in the week, but the deals that reached the market during the week were met with adequate demand. New deals in the high-yield market were met with solid demand, and our traders noted that steady issuance was expected ahead of the following week’s inflation data. The bank loan market also benefited from a favorable technical backdrop.
US Treasury Markets – Current Rate and Bi-Monthly Change
3 Mth +0.09 bps to 4.73%
2-yr: +0.23 bps to 4.52%
5-yr: +0.26 bps to 3.92%
10-yr: +0.21 bps to 3.73%
30-yr: +0.21 bps to 3.82%
SOURCE: FOR THE WEEK ENDING February 10, 2023. BLOOMBERG. YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. YIELD CHANGES ARE FOR ONE WEEK. PAST PERFORMANCE CAN NOT GUARANTEE FUTURE RESULTS.
Interesting News Overseas
Shares in Europe weakened on concerns about overly aggressive central bank policy that might prolong an economic downturn. The pan-European STOXX Europe 600 Index ended the week 0.62% lower in local currency terms. Major stock indexes were mixed. Italy’s FTSE MIB Index gained 1.18%. However, France’s CAC 40 Index fell 1.44%, Germany’s DAX Index declined 1.09%, and the UK’s FTSE 100 Index eased 0.24%.
Several European Central Bank (ECB) policymakers reasserted their hawkish stance in the wake of the most recent rate-setting meeting, warning against complacency in the fight against inflation. Comments by Executive Board member Isabel Schnabel seized the market’s attention at the start of the week. She argued that the recent slowing of inflation wasn’t necessarily due to ECB policy while stressing that underlying inflation was still extraordinarily high. German Bundesbank President Joachim Nagel, Latvian central bank Governor Martins Kazaks, and Dutch central bank Governor Klaas Knot all suggested that rates would have to rise further after what is expected to be another half-point increase in March.
Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 0.59% and the broader TOPIX Index up 0.85%. Speculation was rife about the potential nominees to be the next governor and deputy governor of the Bank of Japan (BoJ). After Japanese markets closed on Friday, the Nikkei news agency reported that the government plans to appoint Kazuo Ueda, an economist and former member of the BoJ Board who had not been mentioned as a shortlisted candidate, as the central bank’s next governor. This came as a surprise following a week when expectations grew that current Deputy Governor Masayoshi Amamiya would be the government’s nominee.
With incumbent BoJ Governor Haruhiko Kuroda’s term ending in April, investors are watching for any potential change in the central bank’s ultra-loose monetary policy stance amid signs of wage growth coming through (the latest data showed real wages turning positive) and particularly if more hawkish candidates are appointed. Against this backdrop, the yen strengthened to about JPY 130.5 against the U.S. dollar from around JPY 131.2 at the end of the previous week. The yen jumped on Friday on reports of Ueda’s potential appointment and some investor expectations of a monetary policy tweak. The yield on the 10-year Japanese government bond (JGB) was broadly unchanged on the week, hovering around the 0.50% level at which the BoJ strives to cap JGB yields.
Lastly, Chinese stocks retreated as the spy balloon controversy fanned tensions with the U.S. and offset expectations of faster economic growth following China’s exit from pandemic controls. The Shanghai Stock Exchange Index and the CSI 300 Index both recorded slight declines for the second week as the diplomatic crisis over the balloon in U.S. airspace reminded investors of the geopolitical risks of investing in the country.
The spy balloon incident raised the prospect of further sanctions on China from the U.S. after the Biden administration announced a sweeping ban on U.S. companies selling advanced semiconductors and specific chip manufacturing equipment to China last October. Relations with China and the U.S. debt ceiling will be the critical public policy catalysts moving markets in 2023, and risks for both are skewed to the downside.
Investors appear to have turned more cautious about China’s outlook following a three-month rally driven by reopening optimism that began last November amid speculation that China was preparing to unwind its strict zero-COVID policy, which Beijing rolled back in December. Despite a burst of economic activity during the weeklong Lunar New Year holiday at the end of January, analysts have lately flagged significant growth headwinds for China.
This Week Ahead
The upcoming week will be crucial on the economic data front, as market participants will be eyeing the Labor Department’s January CPI and PPI index. The headline inflation is likely to have risen 0.5% month-on-month in January, the most since June 2022, but still resulting in the annual rate slowdown to 6.2% from 6.5%. Core CPI is expected to grow 0.4% over the previous month, bringing the annual rate to 5.5%. At the same time, economists forecast producer prices to rebound 0.4% month-on-month in January, resulting in a yearly rate of 5.4%. Also, retail sales will take a central stage, with forecasts pointing to a 0.9% month-on-month gain after two consecutive periods of decline. Other releases include building permits, housing starts, industrial production, the Philadelphia Fed manufacturing index, and import and export prices. Finally, after this week’s hawkish remarks on the interest rate path from several Fed policymakers, traders will pay close attention to the outlook given by Cleveland Fed president Loretta Mester and St. Louis Federal Reserve President James Bullard. On the earnings front, Coca-Cola, Cisco Systems, and Deere & Company are the most prominent companies to report.
Have a great week!
Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC
This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com