Last Week In Review
I hope you are celebrating the life of Martin Luther King.
Stocks recorded second consecutive positive gains last week as investors weighed vital inflation data and quarterly earnings reporting season kicked off in earnest on Friday. The Nasdaq Composite and growth-oriented sectors outperformed, helped by rebounds in some mega-cap technology-related names, including Amazon.com, Tesla, and Microsoft. Consumer staples shares lagged. JPMorgan Chase, Wells Fargo, and Bank of America beat consensus expectations when they released earnings Friday morning. Still, cautious outlooks from the banking giants caused shares to fall in early trading.
US – Markets & Economy
Investors seemed to spend much of the week waiting for and then reacting to the Labor Department’s report on consumer price index (CPI) inflation on Thursday morning, which Wall Street generally viewed as benign. Headline prices fell 0.1% in December, a tick lower than expected and the first decline since May 2020. The drop brought the year-over-year gain to 6.5%, its lowest level since October 2021. The 12-month increase in core (less food and energy) consumer inflation fell as expected to 5.7%, the slowest pace in over a year. Ongoing increases in the Department’s calculation of shelter costs, which lag actual declines in home prices and rents, were mainly behind remaining inflation pressures.
The week’s economic calendar was pretty light. Still, other data suggested that the economy remained relatively healthy even as inflation pressures eased—bolstering hopes that the Federal Reserve would manage a “soft landing.” Weekly jobless claims fell to a three-month low of 205,000. At the same time, the University of Michigan’s preliminary reading of consumer sentiment jumped much more than expected and reached its highest level since April. The survey showed that consumers expected prices to rise 4.0% over the next 12 months, down from 4.4% in December, although longer-term expectations rose slightly, from 2.9% to 3.0%.
US – Equity Market Performance
|Index||Friday’s Close Week Ending 1/13/2022||Weekly (+/-) Point Change 1/13/2022||% Change YTD Week Ending 1/13/2022|
|S&P Midcap 400||2,580.91||90.96||6.19%|
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 cooling inflation data helped U.S. Treasury yields to continue trending lower, with the yield on the benchmark 10-year U.S. Treasury note falling on Friday morning to an intraday low of 3.43%, its lowest level since soon after the Fed’s mid-December meeting. Favorable technical conditions—subdued issuance levels and signs of positive cash flows into the asset class—underpinned a rally in the municipal market.
The investment-grade corporate bond primary calendar was active early in the week. However, the new deals ultimately reached the low end of weekly estimates— despite a solid performance from several new issues that came to market. In the secondary market, trading volumes remained at or above daily averages.
Elevated cash balances and broad risk-on sentiment before and after the CPI data release supported the performance of high-yield bonds with solid demand across sectors. They also noted that the week’s new deals were a welcome sign for market participants trying to remain invested, who generally preferred higher-quality names. The issuance pipeline seems to be building, with several companies expected to come to the market over the next few weeks.
The positive economic data and supportive technical conditions drove the bank loan market’s performance. Traders I spoke with observed improved demand—especially for discounted names—from retail investors. And there appeared to be minimal selling incentives due to manageable flow activity and light issuance.
US Treasury Markets – Current Rate and Bi-Monthly Change
3 Mth -0.01 bps to 4.57%
2-yr: -0.02 bps to 4.23%
5-yr: -0.09 bps to 3.61%
10-yr: -0.06 bps to 3.50%
30-yr: -0.08 bps to 3.61%
SOURCE: FOR THE WEEK ENDING January 13, 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 rallied for a second consecutive week as better-than-expected economic data raised hopes of a short and shallow recession. However, some central bankers said interest rates would need to rise further, tempering market optimism. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.88% higher. Major stock indexes rose strongly. Germany’s DAX Index climbed 3.26%, Italy’s FTSE MIB Index advanced 2.40%, and France’s CAC 40 Index added 2.37%. The UK’s FTSE 100 Index gained 1.88%.
As expected by economists, official data showed eurozone unemployment remained at 6.5% in November. Meanwhile, investor morale strengthened for a third straight month in January. The economic sentiment index compiled by Sentix rose to its highest level since June last year but remained in negative territory. This follows official eurozone data published earlier this month that showed economic sentiment improving in December for the first time since the start of the Russian invasion of Ukraine.
Gross domestic product in the UK grew 0.1% sequentially in November, beating a consensus forecast for a 0.2% contraction in a FactSet survey of economists. This upside surprise fueled expectations that the economy might avoid a recession. Increased telecommunications, computer programming, and food and beverage services during the World Cup soccer tournament helped the economy grow. The Office for National Statistics said the economy would have to shrink about 0.5% in December to record a second quarter of economic contraction.
Bank of England (BoE) Chief Economist Huw Pill said in New York that the UK faced the risk of persistent inflation, hinting that interest rates would probably rise again. “The distinctive context that prevails in the UK—of higher natural gas prices with a tight labor market, adverse labor supply developments and goods market bottlenecks—creates the potential for inflation to prove more persistent,” Pill stated, which would “strongly influence my monetary policy position in the coming months.” Financial markets expect the BoE to raise its key interest rate by half a percentage point (0.50%) to 4.00% in February.
Japan’s equity markets gained over the week, with risk appetite supported by weaker momentum in U.S. consumer price inflation, which raised hopes that the U.S. Federal Reserve would slow the pace of its interest rate hikes. The Nikkei Index rose 0.56%, and the broader TOPIX Index was up 1.46.
As core consumer price inflation in the Tokyo area rose 4.0% year on year in December—the fastest rate in 40 years—speculation grew that the Bank of Japan (BoJ) could revise its inflation forecasts higher and assess the viability of further monetary policy adjustments at its next meeting (January 17–18). The central bank surprisingly tweaked its yield curve control (YCC) framework in December. As a result, the BoJ was again forced to conduct unscheduled bond-buying operations to keep the 10-year Japanese government bond (JGB) yield around its new 0.50% cap, roughly the level at which it ended the week. The yen strengthened to about JPY 128 against the U.S. dollar from around JPY 132 the prior week.
Lastly, Chinese stocks rose as a softer-than-expected U.S. inflation print and optimism about the post-pandemic reopening outlook boosted sentiment. The Shanghai Composite Index gained 1.19%, and the blue-chip CSI 300 advanced 2.35%, a four-month high.
Hopes that domestic demand will recover in the coming months rose after Beijing abandoned its zero-COVID policy in December and officials stepped up measures to support the struggling property sector. Earlier in the week, China issued a large quota for crude oil imports to prepare for an expected uptick in energy demand as infections start to wane, and economic activity returns to normal. Economists polled by Reuters projected a swift rebound for China’s economy once infections peak and forecast 4.9% growth this year versus an estimated growth pace of about 3% in 2022.
This Week Ahead
As January proceeds, investors look for more insights into the health of the world’s largest economy and the direction of the Federal Reserve’s interest rate hikes. The Bureau of Labor Statistics producer prices index will fuel the debate on whether inflation peaked or could still surprise on the upside. Producer prices are likely to decline 0.1% month-on-month, resulting in a slowdown of the annual inflation rate from 7.4% to 6.8%, the lowest reading since May 2021. On the other hand, the core producer inflation must have risen 0.1% over the previous month, prompting the annual rate to ease from 6.2% to 5.9%. The upcoming week also features the retail sales report from the Commerce Department, with forecasts pointing to a 0.5% month-on-month decline and suggesting that tighter financial conditions continued to dent consumer spending. Building permits, housing starts, and existing home sales will offer further clues about the real estate market. Other releases include industrial production and the Philadelphia Fed Manufacturing Index. A slew of earnings reports will also provide info on corporate America’s performance against stubbornly high inflation and rising interest rates. The most closely watched companies are Goldman Sachs, Morgan Stanley, Charles Schwab, Kinder Morgan, PNC, ProLogis, Netflix, P&G, and Truist Financial.
Have a great week!
Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC
E: [email protected]
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 [email protected]