January 7, 2023

Weekly Market Commentary January 3rd to January 6th 2023

The week led off with manufacturing data from S&P Global and the Institute for Supply Management (ISM). The S&P Global US Manufacturing PMI came in at 46.2, lower than the 47.7 from November, meeting expectations but marking the lowest reading since May 2020. ISM Manufacturing came in below expectations at 48.4, the lowest reading since June 2020. Companies are facing weaker demand and lower input costs, resulting in none of the top six manufacturing industries reporting increases in prices.

The MBA mortgage application index fell 10.3% for the week after falling 3.2% in the prior week. Purchases fell 12% and Refis fell 4.4% with the average 30-year fixed rate sitting at 6.58%, up from 6.42% in the prior week.

The FOMC minutes on Wednesday reiterated the Fed’s hawkish position from the December meeting. Some participants stressed that slowing the pace of rate hikes was by no means a signal that they are pulling back on the inflation fight. There is no intention to begin rate cuts in 2023 as 17 of 19 participants want a terminal rate of over 5%. The market initially sold off on the news but almost entirely recovered by the close of day.

The US labor market stayed strong last month while wage gains cooled. Unemployment came back down to 3.5% as participation inched higher. Nonfarm Payrolls increased 223,000, beating the 203,000 estimate. Average hourly earnings rose 0.3% month-over-month and 4.6% year-over-year, both less than expected. The market had a strong rally off the news as investors believe the Fed will be more willing to ease rate hikes given the weaker wage growth.

The ISM Services index plunged to 49.6 in December, down from 56.5 in November and below even the lowest estimate in the survey of 53.3. This marks the sharpest drop since the start of the pandemic and is a sign that the Fed hikes are beginning to impact services as new orders also took a sharp downturn to 45.2 versus 56 in the prior month. Despite the contractionary services data, commentary was mixed, with some businesses seeing a slowdown and preparing for a recession, while others remain more optimistic.

The equity markets closed green on the week on the back of a favorable jobs report and ISM Services Index reading on Friday. The S&P 500 Index closed 1.5% higher at 3,895, snapping a 4-week losing streak. The Dow Jones Industrial Average closed 1.5% higher at 33,630, and the Nasdaq finished 1.0% higher at 10,569. Conversely, Treasury yields plummeted, with the 10-year US Treasury Yield closing lower at 3.57%, and the 2-year US Treasury yield at 4.26%.

Next week brings the release of the highly anticipated Consumer Price Index, which surveys suggest should come in below 7% year-over-year for the first time since 2021, continuing a 6-month down trend in the number.

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