Economic and Market Overview
Equity and fixed income markets lacked direction as investors assessed the timing of rate cuts amidst strong U.S. economic data and mixed corporate earnings.
A choppy start to the new year for equities included a new all-time high for the S&P 500 just two days before it concluded the month with its largest post-FOMC selloff since last March. The index nonetheless ended with a positive return, but one that was again driven by the so called “Magnificent Seven” AI-focused names. The equal-weighted version of the S&P fell by 0.8% and the Russell 2000 fell by nearly 4%. After ending 2023 with a furious two-month rally, Treasuries sold off over the better part of the month, before rallying sharply over the final few days as the FOMC meeting provided some clarity on the path of rate cuts. The 30-year yield, for example, topped out at just over 4.40% on 1/24, but retraced roughly half of its YTD move over the next week. In credit, supply surged to open the year, as J.P. Morgan reported $194 billion in total IG issuance, over 40% more than the $136 billion average of the trailing four Januarys. Issuers continued to shy away from the long end, however, as NISA estimates that only 10% of the total came at maturities beyond 10 years. This technical tailwind helped the average OAS on the Bloomberg Long Credit Index reach levels last seen in 2005, as it hit 104 bps late in the month, before widening slightly into month-end. Oil rebounded from a three-month losing streak to end 5.9% higher as tensions persisted in the Middle East, and the Dollar Index gained 1.9%.
Nonfarm payrolls rose at a 216,000 pace in December. The release was 41,000 above consensus, although it included a downward revision of a net 71,000 jobs to the prior two months. Later in the month, however, job openings were reported to have increased by over 100,000, to more than 9 million, surprising economists who had predicted a 175,000 drop. Also, the unemployment rate was 0.1% under forecasts, remaining at 3.7%, but the surprise was driven in large part by a surprise 0.3% drop in the participation rate. For January, the rate of NFP growth is predicted to decelerate to 185,000, with the unemployment rate rising 0.1% when official data are released on February 2. Consumer spending beat forecasts again in December, as headline retail sales grew at a 0.6% pace, beating by 0.2%. More American consumers are seeing the glass as half full according to both the Conference Board and the University of Michigan surveys, which reported the highest level of sentiment since prior to the Fed’s hiking cycle. By contrast, in the manufacturing sector hard data and sentiment indices were fairly mixed. Housing data for December were mixed but positive on balance, as housing starts, new home sales and pending home sales beat, but existing home sales posted a surprise MoM decline. U.S. real GDP grew at a 3.3% annualized rate in Q4 according to the advance release, 1.3% over expectations, as personal consumption rose at a robust 2.8% pace. Q1 GDP growth is expected to slow to around a 2.0% to 2.5% annualized pace.
Headline CPI rose at a 0.3% MoM pace in December (from 0.1% in November), and was 0.1% over surveys. Core CPI rose by 0.3% MoM, as expected. PPI releases, on the other hand, were cooler than expected across the board. Core PCE came in at +0.2% MoM, matching consensus, but was tepid enough to bring the YoY rate to 2.9%, which marked the first sub-3% figure since March 2021. The annualized rate over the last six months is an even more encouraging 1.9%. After two months of declines, breakeven levels rose to start the year. The 2y breakeven climbed 31 bps to 2.33%, while longer term levels, including the 5y/5y, all ended ~10-15 bps higher, landing in the 2.25% to 2.30% range.
As expected, the FOMC left rates unchanged at their January 31 meeting. They took another step towards rate cuts by dropping the tightening bias from the FOMC Statement in favor of neutral forward guidance. The Statement indicated that the Committee is still seeking “greater confidence” that inflation has returned sustainably to target, and Chairman Powell explicitly stated at the press conference that he viewed a March cut as unlikely. We expect the first rate cut to arrive at the May meeting. The Fed also advanced their recent discussion on balance sheet policy, signaling that a decision to reduce the pace of QT could arrive as soon as March.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data is as of the dates noted.
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