Last year, gloom and pessimism ran rampant in the markets. While there is still no shortage of recession talk, the markets rallied in the fourth quarter of 2022, and are making a run to start this year.
What’s behind the firmer footing? Inflation is moderating, Treasury yields have eased and the tight labor market suggests there aren’t any significant signs that growth has stalled.
There’s projected to be just 25 basis point interest rate increases this year, one in February and a final hike in March. Investors may even be expecting a full-blow pivot with a least one 25 bp interest rate reduction by year-end.
A lot of what will happen next will be determined by inflation numbers. The Fed has resolved to guide inflation back to its 2% target. They want to be careful of not repeating what happened in the 1970’s. If the Fed declares inflation victory too early and doesn’t fully squash it, the fear is that it could reignite.
Of course, the opposite can hold true too. If they stay tight too long, they run the risk of a painful recession.
Now, let’s talk about a couple of other areas in focus.
Eyes On The Labor Market
The unemployment rate dipped to 3.5% in December and is hovering at the bottom of the 3.5% – 3.7% range that it held for much of last year.
Weekly first-time jobless claims fell at the start of the year and are running just above 200,000 per week, a historically low number.
Job openings remain extremely high. The high level of openings puts upward pressure on wages, which are not compatible with 2% inflation. If economic activity were to stall, or even contract, openings may substitute for significant layoffs. Right now, the labor market is fragmented with hiring varying by industry and establishment size.
Progress On Inflation
In Jerome Powerll’s December press conference, he went out of his way not to signal a pivot (to rate reduction). He was also adamant the Fed isn’t going soft on its 2% inflation target.
The core Consumer Price Index (CPI) slowed from 6.0% year over year to 5.7% year over year. The year over rate is backward-looking. It’s slower to detect changes in the trend.
The core CPI, which strips out food and energy, has fallen from 7.90% in June to 3.14% in December. It’s cautiously encouraging.
Meaningful progress on inflation is playing out. Further, employment continues to rise, and economic growth hasn’t stalled.
Just as soaring oil prices exacerbated inflation early last year, the drop in oil has lowered headline inflation. It has come in under the core rate in five of the last six months.
Fourth Quarter Earnings
2022 Q4 earnings are currently being released, and as a whole, are expected to drop 2.2%. It’s still early, but most companies are topping conservative estimates.
As the quarter progresses, things that are having an influence on earnings include labor costs, profit margin deterioration, pricing power, currency fluctuations, and whether cost pressures are starting to abate.
Tax Filing Season Begins
This week marked the official start to the tax filing season. With money rolling in from the government, scammers are on standby. The Better Business Bureau warns taxpayers of common schemes used by scammers
5 Things the IRS Will Never Do
- The IRS will never contact you by email or text
- The IRS will never call to demand immediate payment using a prepaid debit card, gift card, or wire transfer.
- The IRS will never demand that you pay taxes without the opportunity to ask questions or appeal.
- The IRS will never threaten to bring in police, immigration or other agencies to have you arrested.
- The IRS will never ask for your credit or debit card numbers over the phone.