Investors eagerly await inflation data and a Fed decision this week
ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL
WEEKLY MARKET PERSPECTIVES — December 12, 2022
The S&P 500 Index posted its first weekly decline in three weeks and gave back most of its gains experienced over the two weeks leading up to last week. The S&P 500 shed 3.4% on the week and has declined in six of the last seven trading sessions. Notably, the Index posted its worst week since September. Bearish market themes continue to point to sticky inflation, upside pressure in the Federal Reserve’s terminal rate, a higher for longer interest rate environment and heightened recession risks heading into next year.
After recently pushing through the 4,000 level and briefly spending a few trading sessions above its 200-day moving average, the S&P 500 has had trouble maintaining positive momentum as of late. However, the U.S. broad-based stock barometer closed the week at 3,934—only a handful of points above our year-end S&P 500 target of 3,900, which we adjusted back in September. Despite the recent loss of momentum across stock prices, it's worth mentioning that the S&P 500 gained over +13.0% between October and November and remains higher by over +9.5% from its mid-October lows.
Importantly, stock prices have been able to bounce off their lows on the idea that the Federal Reserve will soon begin slowing the pace of fed fund rate hikes, a pickup in disinflationary trends, and a resilient labor market. A soft-landing scenario for the U.S. economy or at least a manageable “shallow recession” scenario where profit growth doesn’t fall off a cliff next year are other factors that have helped markets recalibrate from very depressed levels in mid-October.
With all that said, the market's tone continues to point to a general risk-off mood. The NASDAQ Composite lost roughly 4.0% last week, while the Dow Jones Industrials Average dropped 2.8%. Value fared better than Growth, though both factors were down for the week. All eleven S&P 500 sectors declined last week. Energy (down 8.4%) was the worst-performing sector, as West Texas Intermediate (WTI) crude shed 11.2%, posting its worst week since April. At $71.53 per barrel, WTI is down over 17% over the last four weeks. Rising recession odds here and abroad, as well as growing supply, have put pressure on oil prices.
Healthcare and consumer staples show some strength despite volatility
Conversely, sectors such as Healthcare (down 1.3%) and Consumer Staples (down 1.8%) outperformed last week and have shown all year each can act more defensively when the broader market is under pressure. While the S&P 500 has been marginally down over the last four weeks, Consumer Staples and Healthcare are each positive. Heading into the new year, each sector offers a range of companies with attributes we consider essential for navigating volatility. Exposure to high-quality companies with predictable earnings streams, strong cash flows, low debt, and stable businesses that can grow in or out of recession will likely remain critical portfolio levers in early 2023.
On the week, the 2-year U.S. Treasury yield closed at 4.36%, and the 10-year Treasury yield finished at 3.58%. Notably, Treasury yields moved lower most of the week, with the 10-year touching near 3.40% at one point before settling higher. The U.S. Dollar Index was stronger against most major currencies, particularly the Japanese yen. And Gold was little changed on the week, finishing at $1,807.80 per ounce.
All eyes will be on inflation data ahead of the Fed meeting this week
In economic developments, producer price inflation came in hotter than expected and somewhat dented the building narrative that inflation pressures are ready to roll over. The November headline Producer Price Index (PPI) rose +0.3% month-over-month, faster than October’s rate of +0.2%, which was also the consensus forecast for November. However, headline PPI rose +7.4% year-over-year, slower than October’s rate of +8.0%, and core PPI (which excludes food and energy) rose +6.2% y/y, which was also slower than the +6.8% rate seen in the prior month. Bottom line: Despite lower energy costs for producers, the bulk of the headline increase came from higher service prices. Last month, there was also a notable jump in food prices, which flowed into the headline number. Unfortunately, producer prices are ebbing slowly, which could influence the speed and magnitude of how quickly consumer inflation declines over the coming months.
On a positive note, December preliminary Michigan Sentiment inflation expectations showed consumers believe price inflation will ebb lower to +4.6% over the next year, down 0.3% from the last survey. That’s the lowest print on one-year inflation expectations for the survey since September 2021. And while five-year inflation expectations were unchanged in the latest survey, consumers clearly believe price pressures will have decreased meaningfully by this time next year. That’s a positive for the Federal Reserve’s strategy on curbing inflation and coming into the last FOMC decision of 2022 on Wednesday.
However, before the Federal Reserve provides a rate policy update this week, the central bank will get another look at U.S. inflation trends in the closely watched November Consumer Price Index, which hits on Tuesday. FactSet estimates call for headline CPI to rise +0.3% month-over-month in November and slower than the +0.4% pace seen in October. Headline CPI is expected to fall to +7.3% year-over-year from +7.7% in October. November core CPI is also expected to moderate lower. Lower energy prices are expected to drive down headline CPI, while food prices could remain elevated. A decline in used-car prices, holiday discounts, economic normalization, and easing supply constraints could all add disinflationary pressures on November CPI. However, elevated shelter prices could provide a stickier component to core CPI, with housing factors acting to delay a more material shift lower in consumer prices.
The week's highlight will likely come from the Federal Reserve’s FOMC meeting, even though the outcome is pretty much baked into expectations. In its last FOMC meeting of the year, the Fed is widely expected to slow the pace of its rate hikes down to 50 basis points on Wednesday from its four-meeting pace of 75 basis points each. Such a move would put the fed funds target rate at 4.25% - 4.50%. However, the Fed’s policy statement and Fed Chair Powell’s follow-up press conference will likely point to a “higher for longer” message. Policymakers could also scrape language in the December policy statement outlining “ongoing increases” when it comes to the fed funds rate in favor of language that stresses a shorter path to reaching a terminal rate.
Investors may be disappointed to hear a ‘higher for longer’ message from the Fed
The consensus view is that the fed funds rate will likely top out around 5.00% to 5.25% in the first half of 2023. Fed watchers believe the December Summary of Economic Projections could show FOMC members see a higher terminal rate in 2023 compared to September. Notably, the dot plot could also show rate cuts in both 2024 and 2025, which could put the fed funds rate back below 3.0% in out years. But based on the CME FedWatch Tool, some of the market sees rate cuts as soon as the back half of 2023. Investors should expect Mr. Powell’s press conference following the policy decision to lean hawkish and stress the job of bringing down inflation is far from complete. As such, we suspect some investors may be disappointed in hearing a higher for longer message or comments that erode the probability of rate cuts in 2023. Stocks may struggle to cope with Fed messaging that contradicts the idea that Mr. Powell and company are drawing closer to the end of their tightening cycle or rate cuts are forming on the horizon.
In other items to watch this week, the November NFIB Small Index (Tuesday), October industrial production (Wednesday), and November retail sales (Thursday) will likely grab investor attention in the background. Overseas, The European Central Bank (ECB), Bank of England (BoE), and the Swiss National Bank (SNB) are all expected to downshift rate hikes this week to 50 basis points.
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
The fund’s investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
The Purchasing Managers’ Index™ (PMI™) is a composite index based on five of the individual indexes with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers’ Delivery Times - 0.15, Stock of Items Purchased - 0.1, with the Delivery Times index inverted so that it moves in a comparable direction.
The Institute for Supply Management (ISM) manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies. It is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.