Last week’s headlines focused on softening economic data, pointing to a slowdown in the U.S. economy. Retail sales fell further than expected, and the slowdown in existing home sales is the worst in more than a decade. The strong labor market remains an outlier, in contrast with recent layoff announcements from major technology and financial companies. This week, the ramp up in earning reports should provide insight into inflationary pressures, with nearly 100 companies reporting. Important economic indicators will be released this week, including the Federal Reserve’s (Fed’s) preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, and the first reading of GDP for the fourth quarter. Multiple purchasing managers’ indices (PMIs) are also on deck, with last month’s numbers showing contraction across U.S. manufacturing and services. Investors will not receive any guidance from the Fed as its blackout period begins ahead of its February Federal Open Market Committee meeting.
The S&P 500® ended the week down 0.6%, even with Friday’s 1.9% rally, as Fed officials supported lowering the next rate hike to 25 basis points (bps). The index closed the week near its 200-day moving average as it remains in a narrow trading range and, in our view, feels directionless as investors struggle to interpret the impact of slowing economic data with further Fed rate hikes.
The MSCI World ex USA Index ended the week slightly positive, impacted largely by poor performance in Japan’s Financials sector after the Bank of Japan (BOJ) surprised markets by keeping policy unchanged. The BOJ’s still-accommodative policy remains in sharp contrast to most other major central banks.
The MSCI Emerging Markets Index outperformed its global counterparts as Chinese equities continued to rally amid the end of Chinese COVID-19 restrictions. The Communications Services and Information Technology sectors led returns going into the Lunar New Year; Chinese markets are closed all week in observance of the holiday.
Fixed Income Markets
Interest rates experienced volatility throughout the week but ended largely unchanged. Despite signs of slowing economic growth and lower price pressures, breakeven rates, which are used as a measure to gauge market expectations for future inflation, have risen to their highest levels since the beginning of the year. In our view, the rise in breakeven rates stems from the thought that inflation has the potential to be stickier on the way down, making the Fed’s goal of reaching 2% inflation a challenge in the near term.
Chart of the Week
Fourth-quarter earnings season continued last week with 11% of S&P 500 constituents now having reported. The blended earnings growth rate (actual growth rate combined with consensus estimates) is -4.6%, lower than the prior week and the -3.1% growth rate estimated at quarter end.
Negative revisions were the result of another heavy week of Financials earnings that saw mixed results. Earnings misses were marked by higher loss provisions and lower investment banking revenues, while beats saw generally better fee income results. Industrials saw modest positive revisions as the sector benefited from strong travel demand and higher pricing within airlines.
Multiple job cut announcements and cautious revenue guidance continue to pressure estimates, with 2023 earnings-per-share estimates now at 3.6% compared to last week’s 3.9%.