Yields Fall on Signs of Lower Inflation, US Report Expected to Show Slowing Inflation
Last Week Review
Global equities gained 2.0%, led by a 3.1% rise in emerging markets followed by a 2.6% gain in non-U.S. developed markets and a 1.5% increase in the U.S. The two-year Treasury yield fell 0.18% to 4.25% while the 10-year yield dropped 0.32% to 3.56%. German government bond yields, a proxy for euro area yields, also fell with signs of lower inflation.
A Weak December
Stocks and bonds had losses in December on a weaker economy and hawkish comments from the Federal Reserve and European Central Bank. Those challenges more than offset the positive developments of China’s economic reopening and less aggressive rate hikes by central banks. Global equities in December declined 3.8%, led by a 5.9% fall in the U.S. followed by a 1.3% decline in emerging markets and a slight dip in non-U.S. developed markets. Bonds fared better than equities but had slight losses. The 10-year Treasury yield hit a recent low before bouncing to end the month up 0.27%, while the two-year yield was somewhat rangebound but increased 0.12% for the month. Investment grade bonds fell 0.5% while high yield slid 0.6%.
U.S. Labor Cools but Stays Strong
U.S. job gains slowed in December to 223,000 from 256,000 in November. The unemployment rate declined to 3.5% from 3.6% while the participation rate, or percentage of people of working age who are working or looking for work, edged up to 62.3% from 62.1%. Wage growth slowed to 4.6% year-over-year from 4.8% in November. November’s wage growth was revised down from 5.1%, helping alleviate earlier concerns on the magnitude of the increase. We think the slowdown in wage growth, more than expected, is a positive development for the Fed. Still, we believe the labor market remains too strong to prompt a Fed policy pivot.
Slowing Inflation in Europe
The Flash Europe Consumer Price Index declined 0.3% month-to-month. The core index, excluding more volatile food and energy prices, still remained elevated at 5.2% year-over-year. However, broadly the data fueled hopes that Europe’s inflation has peaked. Moreover, the prices paid index within the U.S. manufacturing Purchasing Managers’ Index declined for the ninth consecutive month. We believe receding prices raise the odds of less aggressive central bank activity, but inflation likely needs to decline to satisfy monetary policymakers. The Fed’s meeting minutes released last week contained no major surprises but made clear that much work remains to achieve price stability.
This Week Preview
U.S. Inflation Expected to Ease
The U.S. Consumer Price Index report for December is scheduled for Thursday. Inflation is expected to be flat month-to-month, which would bring the year-over-year level down to 6.5% from 7.1%. Core inflation is expected to rise 0.3% month-to-month, with the year-over-year level falling to 5.7% from 6.0%. The progression of inflation data remains paramount to the course of monetary policy, and we believe the Fed will unlikely react to slowing economic growth if inflation trends remain too high. This week, Federal Reserve Chair Jerome Powell and St. Louis Fed President James Bullard are scheduled to speak.
JPMorgan and Citigroup to Report Earnings
Financials companies JPMorgan (JPM) and Citigroup ( C ) are scheduled to report earnings on Friday, among the first major U.S. companies to report fourth-quarter earnings. For earnings broadly, investors expect lackluster sales growth of 3–4% year-over-year and a 4% decline in earnings.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of January 8, 2023.
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