Last Week on WallStreet - February 4, 2023

S&P 500: 1.62% DOW: -0.15% NASDAQ: 3.31% 10-YR: 3.53%

What Happened?

With the direction of markets in Jerome Powell's hands, Fed week on Wall Street was as eventful as always. The early sessions were largely tame with the indices trading up and down days ahead of the FOMC meeting results Wednesday afternoon. After a decision and press conference that provided sources for optimism, markets roared upwards as the S&P gained almost 1.5% in the final hour and a half of trading. The gains carried through the week despite a stronger-than-expected jobs report instigating losses in Friday's session.

Beneath the surface, markets recorded another week of leadership from the sectors that suffered most last year. Communications (5.2%), Technology (3.7%), and Discretionary (2.3%) climbed the highest on the optimism found. Energy (5.8%) plummeted this week as oil and gas prices fell considerably.


Fed Slows Its Tightening with Quarter-Point Interest Rate Rise

  • The Federal Reserve nudged up short-term interest rates by a quarter-percentage point and signaled it was on track to do so again at its meeting next month
  • Officials agreed to slow rate rises to gain more time to study the effects of their moves
  • The latest increase caps a year in which the Fed lifted the fed-funds rate from near zero to a range between 4.5% and 4.75%, the highest level since 2007

The key takeaway - While markets have expected the 25 bps rate increase for some time now, the real story always comes with the Fed President Jerome Powell's news conference following the decision. In that presser, Powell attempted to stay with the story line we have heard so far and maintain a hawkish tone, but new verbiage on their inflation thoughts provided optimism for investors. Powell admitted we have made tangible progress on the inflation front and that only a couple more hikes could be necessary before they reach the appropriate restrictive level. The labor market, however, remains incredibly tight and could cause problems for the bank's goals.


Payrolls Increased by 517,000 in January, Crushing Estimates, as Unemployment Rate Hit 53-Year Low

  • Nonfarm payrolls increased by 517,000 for January, above the Dow Jones estimate of 187,000 and December’s gain of 260,000
  • The unemployment rate fell to 3.4% versus the estimate for 3.6%. That is the lowest jobless level since May 1969
  • The labor force participation rate edged higher to 62.4%
  • Average hourly earnings increased 0.3%, in line with the estimate, and 4.4% from a year ago

The key takeaway - In normal times, a strong labor market is a sign of good things to come and a healthy economy. These are all but normal times and in this environment the labor market's tightness continues to cause problems for the Federal Reserve. This unexpectedly strong report shows a job market that is growing, not loosening as the bank would like to see. The primary concern around the tightness is that it perpetuates wage gains, also seen in the report, pushing up costs of production and prices. If this dynamic keeps a floor under inflation, the Fed may have to go further than expected to create slack in employment.


US Service Sector Rebounds in January as Manufacturing Sinks - ISM Survey

  • The Institute for Supply Management (ISM) said on Friday its non-manufacturing PMI increased to 55.2 last month after falling to 49.2 in December
  • Economists expected a rise to only 50.4
  • New orders rose strongly while prices paid eased slightly
  • The ISM's manufacturing survey dropped to 47.4, firmly in contractionary territory
  • New orders fell sharply as prices paid rose

The key takeaway - The services sector, which accounts for two-thirds of economic activity, is maintaining its resiliency and shows a consumer that is willing to spend. The manufacturing index is telling a very different story as data from this area of the economy continues to deteriorate. Markets use this data to project how the economy may fair this year as we head towards possible recession. With the services index displaying strength there could be more optimism for a soft landing scenario.


From the Waterloo Watercooler

A half million workers walked off the job yesterday in the UK seeking higher wages amid a cost of living crisis

Tom Brady celebrated the one-year anniversary of his retirement announcement with...another retirement announcement

Biotech startup that plans to “resurrect” the woolly mammoth announced a fresh round of funding that’s aimed at de-extincting the famously extinct dodo

As of the end of last year, 64% of US consumers were living paycheck to paycheck, up from 61% the year before, according to a survey of ~4,000 people