Last Week in Review – January 27, 2023

Last Week In Review

Last week stocks resumed their winning streak, as investors appeared to welcome some hopeful signals that the economy might skirt a recession in 2023. Consumer discretionary stocks were solid, thanks partly to a big jump in Tesla shares over the week following a favorable outlook from CEO Elon Musk. The typically defensive consumer staples, health care, and utility segments lagged. Relatedly, value stocks underperformed growth shares.

The week started strong due in part to an article over the weekend by Nick Timiraos, a Wall Street Journal reporter known as the “Fed Whisperer” for accurately predicting previous turns in Federal Reserve policy. Timiraos cited recent comments from Fed governor Christopher Waller, previously an advocate for aggressive rate hikes, in which he highlighted “ample evidence” of slowing demand and said he would support a quarter-point rate increase at the Fed’s next two-day policy meeting concluding February 1. Recent statements from Treasury Secretary Janet Yellen said she was encouraged that falling energy and easing supply chain bottlenecks were cooling global inflation.

The gains came despite another disappointing week of earnings reports, with companies representing roughly 20% of the S&P 500 Index market capitalization reporting results. Microsoft, the second-most heavily weighted stock in the index, fell sharply after the company reported a larger-than-expected decline in earnings and a slump in revenues that it expects to continue into 2023. Other weak performers included IBM and Intel.

US – Markets & Economy

The week’s inflation data were arguably a little less encouraging, however. On Monday, S&P Global reported that its composite gauge of current manufacturing and services sector activity climbed to 46.6, up from 45.0 in December (readings below 50.0 indicate contraction). While a positive surprise, the report also showed that input prices increased in January, breaking a seven-month streak of declines. The increase occurred despite manufacturing input purchases pulling back the most since May 2020, as firms worked through bloated inventories.

Indeed, inventory accumulation appeared to provide an unexpected—although temporary—boost to growth in the final quarter of 2022. The Commerce Department reported Thursday that the U.S. economy expanded at an annualized rate of 2.9% in the quarter, beating consensus estimates of around 2.6%. The price index in the report also surprised moderately on the upside, rising 3.5%.

Friday’s important inflation data aligned with expectations, seeming to help foster a modest rally to end the week. The Fed’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index, rose 4.4% over the year ended in December, still above the Fed’s 2% long-term inflation target but well below its 5.4% peak in February 2022 and the slowest pace in 14 months. Friday also brought news that consumer spending decreased 0.2% in December, a tick more than expected, providing further evidence that Americans were balking at paying higher prices.

US – Equity Market Performance

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

While the mixed economic data failed to impact the Treasury market significantly—the yield on the benchmark 10-year U.S. Treasury note increased moderately over the week—the positive prints seemed to support the investment-grade and high-yield bond markets, according to our traders. (Bond prices and yields move in opposite directions.) The municipal bond market was calm primarily with increased inflows but light new issuance, while bank loans enjoyed solid demand in a generally “risk-on” environment.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe rose as some encouraging economic data points helped to overcome concerns about the pace of monetary policy tightening. The pan-European STOXX Europe 600 Index ended the week 0.67% higher in local currency terms. Major stock indexes also advanced. Italy’s FTSE MIB Index gained 2.56%, France’s CAC 40 Index climbed 1.45%, and Germany’s DAX Index added 0.77%. The UK’s FTSE 100 Index posted a modest loss.

French and Swiss bond yields rebounded from midweek lows after European Central Bank (ECB) Governing Council member Klaas Knot called for half-point interest rate increases at the following two policy meetings. In the UK, benchmark 10-year yields hovered near recent highs ahead of a Bank of England policy meeting.

ECB President Christine Lagarde, Knot, and fellow Governing Council member Ollie Rehn repeated their recent calls for “significant” rate increases in February and March. However, Executive Board member Fabio Panetta told Germany’s Handelsblatt newspaper that there was too much economic uncertainty to unconditionally pre-commit to a specific policy course beyond February. He added: “Inflation is still too high, but recent developments suggest that we can fend off the risks of second-round effects and bring down inflation by adjusting our policy rates in a well-calibrated, non-mechanical way.” 

Japan’s stock markets rose over the week, with the Nikkei 225 Index registering a 3.12% gain and the broader TOPIX Index up 2.90%. The sentiment was boosted by the U.S. economy registering a solid, albeit slower, growth rate ahead of expectations over the final quarter of 2022, with a 2.9% expansion raising hopes of a soft landing. Investors’ focus was also on Tokyo’s core consumer price inflation, a leading indicator of nationwide trends, which rose 4.3% year on year in January, exceeding the Bank of Japan’s (BoJ’s) 2% inflation target for the eighth straight month and adding pressure on the central bank to tighten its ultra-loose monetary policy.

The yield on the 10-year Japanese government bond (JGB) rose to 0.47% from 0.40% at the end of the previous week. The yen weakened slightly, to around JPY 129.91 against the U.S. dollar, from about JPY 129.56 the prior week.

Published during the week, the Summary of Opinions at the BoJ’s January 17–18 Monetary Policy Meeting concluded that the central bank must take some time to examine the effects that the modification of yield curve control decided at its December meeting has on market functioning. (The BoJ expanded the range of 10-year JGB yield fluctuations to half a percentage point on either side of the 0.0% target level in December.)

There has been upward pressure on long-term interest rates, and the distortions on the yield curve have not dissipated; however, it may take some time for market functioning to recover. The BoJ stated that it is appropriate “To continue with monetary easing. However, it is necessary to examine this at some point in the future and assess the balance between positive and side effects.”

Speculation about a BoJ monetary policy pivot is rife. Japan’s Prime Minister Fumio Kishida said during the week that he would likely nominate the new BoJ governor in February. Incumbent Haruhiko Kuroda’s term ends in April, which many anticipate could mark a turning point in the central bank’s trajectory away from its dovish monetary policy stance, which has left it an outlier as other central banks worldwide have been raising interest rates. 

Lastly, financial markets in mainland China were closed for the Lunar New Year holiday, which started on January 21 and will reopen on Monday, January 30. The Hong Kong stock exchange resumed trading on Thursday, and the benchmark Hang Seng Index gained 2.96% for the holiday-shortened week. China’s domestic activity picked up significantly during the weeklong holiday, fueling optimism about a faster-than-anticipated economic recovery as people enjoyed the break from pandemic restrictions. Approximately 95.9 million trips were taken via road, rail, air, and waterways in the first four days of the holiday, or a daily average of 24 million trips compared with 18.6 million over the 2022 break, according to Ministry of Transport data. 

However, spending by Chinese consumers is expected to remain restrained in the near term as the country recovers from three years of pandemic restrictions. Household bank deposits grew by a record RMB 17.8 trillion in 2022 as the pandemic kept people home, according to China’s central bank.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com