S&P 500: -1.11% DOW: -0.17% NASDAQ: -2.41% 10-YR: 3.74%
Last Week on WallStreet - February 11, 2023
Markets have attempted to digest an avalanche of incoming data over the past few weeks, from earnings to economic data to Federal Reserve commentary. Amidst all of this volatility, the bears won out this week leading the indexes lower on fears of recession, hawkish Fed policy, and disappointing earnings to come. Investors are now at a standstill with neither side firmly taking hold after January's solid performance.
Beneath the surface, 10 of 11 sectors of the market finished lower this week while Energy (4.9%) ripped higher on elevated oil prices. Communications (-5.57%), which has enjoyed the sharpest turnaround from a disappointing 2022, fell harshly due to Alphabet shares falling 7.6% this week.
Fed Chair Powell Says Inflation is Starting to Ease, But Interest Rates Likely to Rise
- Federal Reserve Chairman Jerome Powell said Tuesday that inflation is beginning to ease, though he expects it to be a long process
- He cautioned that interest rates could rise more than markets anticipate if the economic data doesn’t cooperate
- “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in,” he said
The key takeaway - Fed President Powell has addressed markets back-to-back weeks, summoning the volatility that usually follows his words. This week, however, he had fresh job data from last Friday's report, which the FOMC did not have when they made their most recent rate decision. As written in past newsletters, the labor market continues to challenge the Fed and is one of the primary hurdles in its inflation battle. Last week's data showing historically low unemployment figures are another point of labor strength and tells the Fed that they may have more work ahead than they expected.
US Consumer Sentiment Improves; Inflation Expectations Rise
- The University of Michigan's preliminary February reading on the overall index of consumer sentiment came in at 66.4, the highest reading since January 2022
- Economists polled by Reuters had forecast a preliminary reading of 65.0
- One-year inflation expectations increased to 4.2% this month from 3.9% in January while the five-year inflation outlook was unchanged at 2.9%
The key takeaway - The stock market's blistering rally to start 2023 has lifted consumer sentiment and fed optimism that there is less economic pain to come than was previously expected. Last week's strong employment report showed a resilient labor market which also typically elevates sentiment. Consumers are expecting higher prices in the short term, reflecting increased grocery bills and prices at the pump. While longer-term inflation expectations were stable, these figures still rest above the Fed's target and, if entrenched, could cause more problems for the central bank.
US Jobless Claims Climbed Last Week But Remain Historically Low
- Initial jobless claims, a proxy for layoffs, increased by 13,000 to a seasonally adjusted 196,000 last week
- In 2019, when the labor market was also tight, claims averaged about 220,000 a week
- Layoffs across various sectors contributed to the rise in claims
- The four-week moving average of weekly claims, which smooths out volatility, fell slightly to 189,250
The key takeaway - Despite the increase in unemployment claims this week, new claims still reside below pre-pandemic levels even in the face of significant layoff announcements from major corporations. This adds to ongoing data of a historically tight jobs market which will face off against the Federal Reserve in its battle with inflation. Chair Powell hopes their restrictive action will dampen labor and allow recent disinflation to continue.
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