ND&S Weekly Commentary 12.12.22 – Will Fed Chair be the Grinch who stole Christmas?

The stock market retreated last week as investors grew anxious over the economic outlook and the Federal Reserve’s response to tame inflation. The ongoing strength of the job market and consumer spending are ironically causes of concern and may trigger the Fed to continue raising interest rates higher and longer than expected.

For the week, the S&P 500 dropped 3.35%, the DJIA lost 2.74%, and the tech-heavy Nasdaq slid 3.98%. The Russell 2000 small-cap index tumbled 5.06%. The decline in the U.S. dollar and China’s lifting of Covid restrictions helped international equities. Developed markets (MSCI-EAFE) declined only 0.19% while emerging (MSCI-EM) rose 0.48%. Since mid-October, EAFE and EM have risen roughly 19% and 15%, respectively. The price of U.S. crude oil fell 11% to $71.58 a barrel and is down almost 23% from its high in early November. The price of gold declined slightly to $1,796 per ounce.

Last Friday, the Producer Price Index (PPI) rose modestly on a year-over-year basis 7.4%, higher than the consensus estimate of 7.2%. Investors were hoping for a slightly lower number to show that the Fed’s policies were making progress. The spread between the 2-year U.S. Treasury note and the 10-year note is now the widest since the early 1980s. The yield on the 2-year note rose 5 bps to 4.34% and the 10- year note increased 6 bps to 3.57%.

All eyes will be on the Consumer Price Index (CPI) to be reported on Tuesday, and the Fed meeting concluding on Wednesday. We hope to see that inflation is continuing to moderate and that the Fed will only increase the Federal Funds Rate by 0.50%. Chairperson Jerome Powell’s remarks on the economy, inflation, and the Fed’s strategy going forward will be closely examined.

“Maybe Christmas doesn’t come from a store. Maybe Christmas, perhaps, means a little bit more.” -The Grinch