Economic Update 2-22-2023
- Economic data for the week included producer and consumer prices staying elevated, although still decelerating on a year-over-year basis. Industrial production was little changed, while several regional manufacturing indexes showed divergent results. Housing data was also mixed.
- Equities ended in varied directions last week, with flattish U.S. returns, while Europe gained, and Asia fell back. Bonds also lost ground with interest rates moving higher along with persistent inflation concerns. Commodities fell across the board, along weaker energy prices and a stronger dollar.
U.S. stocks fell back slightly last week as both producer and consumer inflation failed to cool as fast as was hoped, coupled with strong retail sales figures. This, of course, was taken to imply a Fed that stays hawkish for longer, with perhaps even another quarter-point hike mid-year now baked into some estimates. In recent weeks, a 5.00% possible terminal rate has now morphed closer to 5.25-5.50%, although the sharp increases seem to still be in the rear-view mirror. By sector, a mix of growth (consumer discretionary and communications) and defensives (staples and utilities) earned positive returns, while energy fell by over -6% on the losing side.
Foreign stocks gained in Europe and the U.K., while Japan and emerging markets fell back on the week. Similar to the U.S. in some respects, sentiment in Europe has continued to strengthen, along with stronger-than-expected corporate earnings results, while inflation in the U.K. slowed. However, the ECB remains steadfastly hawkish, with continued expected rate hikes in coming meetings, as with the U.S. Fed. Speaking of central banks, a change in the Bank of Japan leadership has raised questions about the potential for breaking out of the yield curve control policy, and letting long-term rates rise higher to a more natural level. Chinese equities fell back upon sentiment challenged by less favorable rhetoric concerning U.S.-China relations, related to the recent balloon incidents, although details still remain unclear.
Bonds fell back last week as well, with firmer inflation numbers pushing interest rates higher as a variety of economists decided to raise estimates for the Fed terminal rate by another quarter-percent roughly. In fact, the 1-year T-bill yield breached 5% for the first time in 15 years, as investor expectations for a higher Fed funds rate seeped into markets, but the curve remained solidly inverted. Treasuries outperformed corporates, although high yield and floating rate bank loans outperformed. Foreign bonds were held back by both higher rates and a stronger U.S. dollar.
Commodities declined across the board last week, not helped by strength in the dollar, despite continued expectations for rising demand through the year. Energy led the way downward as crude oil prices fell -4% last week to under $77/barrel, and natural gas declined another -9%, with warmer winter temperatures weighing on heating demand and higher inventories for petroleum generally.
|Period ending 2/17/2023||1 Week %||YTD %|
|Bloomberg U.S. Aggregate||-0.47||1.07|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.