January 13, 2023

Weekly Market Commentary January 9th to January 13th 2023

Inflation retreated modestly to close out 2022 as December’s report showed signs of progress. Headline CPI (Consumer Price Index) matched estimates falling 0.1% as energy and used car prices tumbled during the month, decreasing by 4.5% and 2.5% respectively. Core CPI, which excludes the more volatile food and energy items, increased 5.7% over the prior year, in line with estimates but below the 6% figure in November. For the past six months, year-over-year inflation numbers have eased from a high in June. Although these are encouraging signs that inflation is abating, services inflation soared to its highest level since September 1982 and will likely keep the Federal Reserve on their tightening path. Markets are fully pricing in a 25-basis point rate hike for February’s FOMC meeting.

Real wages have now fallen for 21 straight months, and consumers are turning to credit to fuel their spending habits. Consumer Credit jumped $28 billion, higher than the $25 billion increase that economists expected. This increase represented a seasonally adjusted annual rate of 7.1% while revolving credit, which consists mostly of credit cards grew 16.9%.

Consumers are continuing to spend as they are becoming more confident that price pressures will ease over the next 12 months. Participants of the University of Michigan survey now expect inflation of only 4% in 2023, its lowest reading since April 2021. Ironically, 5-year inflation expectations ticked up to 3.0% from the 2.9% that was expected.

If the first two weeks are any indication, 2023 returns will look vastly different than last year as financial markets have rallied to start the year. Year-to-Date, the S&P 500 is up 4.2% finishing the week at 3999, while the Nasdaq has increased 5.9% at 11,079 and DOW Jones Industrials up 3.5% at 34,302. Yields have fallen across the curve, with the 10-year U.S. Treasury falling to 3.51% from 3.56% in the past week.

Next week key releases include Retail Sales, Housing Starts and Building Permits.

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