Week of December 12, 2022

The U.S. equity markets are entering a week rich in vital economic data after closing last week on the downside.  Last Friday, the Dow fell 305 points, or 0.9%, while the S&P 500 dropped 29 points, or 0.73%.  The tech-heavy NASDAQ lost 77 points, or 0.7%.  On the week, major U.S. equity indices suffered their biggest setbacks since September.

November’s jobs report saw non-farm payrolls rise by 263,000, bringing the three-month average to a robust 272,000.  The labor participation rate fell to 62.1% suggesting a substantial number of job openings remain.  In fact, the U.S. economy has more than 10 million jobs currently available.

“All of this suggests to us that Chair Powell will lean hawkish in his press conference, pushing back against easing in financial conditions and reminding investors that a slower pace of hikes does not mean a lower terminal rate,” Bank of America said in a report.  BofA’s baseline forecast sees the federal funds rate peaking at a target range of 5% - 5.25% in the middle of 2023, but Michael Gapen, the bank’s chief economist, said in a recent call with reporters it may go as high as 6% given the labor market’s continued momentum.  The Federal Funds rate stands in a range of 3.75% - 4%. On Wednesday, members of the Federal Open Market Committee (FOMC) and expected to increase rates by 0.5%, a slowdown from the 0.75% increases made over their four past meetings.

As for Tuesday’s consumer price index (CPI) report, economists project headline CPI to rise 0.3%, a slight moderation from the 0.4% seen in October, estimates compiled by Bloomberg show.  CPI is expected to rise 7.3% in November, down from October’s year-over-year reading of 7.7%.  Core CPI, which strips out volatile food and energy prices, is expected to have risen 6.1% last month, slightly less than the 6.3% seen in October.

“The only way to bring inflation back towards target on a sustained basis is to slow down the labor market,” strategists at BofA noted.