Monthly Market Updates

Inflation Continues to Decline, Employment Steady

• • Gross Domestic Product (4Q22 GDPNow): The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 was 3.7% as of December 23.
  • Employment (December): Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5% (from 3.7%). The labor force participation rate was little changed at 62.3% (62.1% in November). Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance.
  • Inflation (November): The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1% in November on a seasonally adjusted basis after increasing 0.4% in October. Over the last 12 months, the all-items index increased 7.1% before seasonal adjustment (vs. 7.7% in October). The index for all-items less food and energy rose 0.2% in November, after rising 0.3% in October. The all-items less food and energy index rose 6.0% over the last 12 months.
  • The Producer Price Index (PPI) (November) for final demand increased 0.3% in November, seasonally adjusted. On an unadjusted basis, final demand prices advanced 7.4% for the 12 months that ended in November.
  • Retail and Food Services Sales (November): Advance estimates of U.S. retail and food services sales for November 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $689.5 billion, down -0.6% (±0.5%) from the previous month, but up 6.5% (±0.7%) above November 2021.
  • Personal Income and Consumer Spending (November): Personal income increased $80.1 billion (0.4%) in November, according to estimates released by the Bureau of Economic Analysis. The PCE price index increased 0.1% in November on a month-over-month basis. Excluding food and energy, the PCE price index increased 0.2% from October. From the same month one year ago, the PCE price index for October increased 5.5%. Food prices increased 11.2% and energy prices increased 13.6%. Excluding food and energy, the PCE price index increased 4.7% from one year ago.

OECD Outlook: Slowing Growth

Key takeaways:

• The global economy is reeling from the largest energy crisis since the 1970s. The energy shock has pushed up inflation to levels not seen for many decades and is lowering economic growth all around the world. The OECD is now forecasting that world growth will decline to 2.2% in 2023 and bounce back to a relatively modest 2.7% in 2024. Asia will be the main engine of growth in 2023 and 2024, whereas Europe, North America, and South America will see very low growth.
• Central banks around the world are increasing interest rates to curb inflation and anchor inflation expectations in their respective economies. This strategy is starting to pay off. For example, in Brazil, the central bank moved swiftly, and inflation has started to come down in recent months. In the United States, the latest data also seems to suggest some progress in the fight against inflation.
• We are currently facing a very difficult economic outlook. Our central scenario is not a global recession, but a significant growth slowdown for the world economy in 2023, as well as still high, albeit declining, inflation in many countries. Risks remain significant. In these difficult and uncertain times, the policy has once again a crucial role to play: further tightening of monetary policy is essential to fight inflation, and fiscal policy support should become more targeted and temporary.

Fed Still Raising Rates, but at a Slower Pace

The final FOMC meeting of 2022 took place on December 14, with the Fed raising rates by +50 bps to a range of 4.25-4.5%. The release included an update to the Summary of Economic Projections (SEP).

Highlights of the December FOMC Statement and Chair Powell’s press conference include:

• Monetary Policy: “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2%. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

Highlights of the Press Conference include:

• Inflation: “Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
• Forecast for Fed Funds in 2023: “As shown in the SEP, the median projection for the appropriate level of the federal funds rate is 5.1% at the end of next year, 1/2 percentage point higher than projected in September. The median projection is 4.1% at the end of 2024 and 3.1% at the end of 2025, still above the median estimate of its longer-run value.”
• Potential for Rate Cuts: “Our focus right now is really on moving our policy stance to one that is restrictive enough to ensure a return of inflation to our 2% goal over time. It’s not on rate cuts. And we think that we’ll have to maintain a restrictive stance of policy for some time. Historical experience cautions strongly against prematurely loosening policy. I guess I would say it this way: I wouldn’t see us considering rate cuts until the Committee is confident that inflation is moving down to 2% in a sustained way. So that’s the — that’s the test I would articulate. And you’re correct. There are not rate cuts in the SEP for 2023.”
• Possibility of Recession: “I don’t think anyone knows whether we’re going to have a recession or not and if we do, whether it’s going to be a deep one or not. It’s just it’s not knowable.”

Monthly and YTD returns

Definitions:

Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).

• GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
• The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
• Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
• The Consumer Price Index (CPI):Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
• The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
• The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work. Source: Bureau of Labor Statistics (BLS).
• Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
• Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
• The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
• The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Monthly and YTD returns (Table): Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (JPM EMBI Global), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond), and Developed Markets Sovereign (excl. US) (JPM GBI Global Ex US). Source: Morningstar.

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