Jobs Data Lifts Risk Appetite

Performance for Week Ending 1.6.2023:

The Dow Jones Industrial Average (Dow) finished up 1.46%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) added 1.46%, the Standard & Poor’s 500 Index (S&P 500) gained 1.45% and the Nasdaq Composite Index (NASDAQ) tacked on 0.98%. Sector breadth was positive with 10 of the 11 S&P sector groups closing higher. The Communication Services sector (+3.70%) was the best performer followed by Materials (+3.45%) and Financials (+3.33%). The Healthcare sector bucked the trend to finish down 0.19%.

*See below for Index Definitions

MARKET OBSERVATIONS: 1/2/23  – 1/6/23

Stocks kicked off the new year on a positive note as a late week rally offset selling pressure earlier in the week. The bulk of the gains came on Friday following the release of the December payroll report. According to the Labor Department, job growth exceeded expectations during the month, the unemployment rate fell, and wage gains slowed more than anticipated, suggesting some modest easing in inflation pressures. Nonfarm payrolls increased 223K in December, capping a near-record year for job growth. Average hourly earnings rose 0.3% from a month earlier and 4.6% from December 2021 after a downward revision to November. The slowdown in wage growth is likely welcome news for the Fed, who see wage pressures as a key obstacle to achieving their 2% inflation goal. The unemployment rate decreased by 0.1 percentage point to 3.5%. The report had a ‘Goldilocks’ feel in the sense that job growth was solid while wage growth slipped, which in turn, should give the Fed some comfort that inflationary pressures have peaked, although the current rate is still somewhat too high. While the payroll data is not likely to stall the Fed’s rate hike campaign in the months ahead, the likelihood of another ‘step down’ continues to grow. Ahead of the jobs report, Bloomberg’s World Interest Rate Probability tool was suggesting a 44% chance of a 50-basis point hike at the early February FOMC meeting, following the report the odds declined to 28%. In terms of rate hike expectations, the next key update will come on Thursday when the December consumer price index (CPI) data is reported. After peaking at 9.1% in June of last year, the headline CPI is expected to decline to 6.5% on a year-over-year basis.

Fed Speak: Mixed signals on the Fed front were also in play this week. Following a lull in in Fed speak over the past couple weeks, several Fed speakers made appearances last week. Notably was St. Louis Fed President James Bullard, who has been in the hawkish camp lately, however this time he struck a cautiously optimistic tone. Bullard characterized the inflation outlook as generally good with a “combination of factors that are making it more likely that 2023 will be a disinflationary year.” Bullard added that rates are "getting closer" to a high enough level to bring down price gains. Other Fed speakers stood firm in their mantra that rates will stay higher for longer. Kansas City Fed President Esther George told CNBC that she's raised her peak federal funds rate to over 5% and suggested it would be appropriate to hold above that level well into 2024. Atlanta Fed President Raphael Bostic said inflation is “way too high” and remains the biggest headwind in the US, reiterating that he and his colleagues remain determined to bring price growth down to the target range. “I appreciate recent reports that include signs of moderating price pressures, but there is still much work to do. I’m sure my central bank colleagues from around the world agree with me on this,” he said at a Fed conference in New Orleans.

The Week Ahead: Consumer inflation will be in the focal point this week with both the consumer price index (CPI) and the University of Michigan inflation expectations survey released. According to consensus expectations from Bloomberg, headline CPI during December is expected to be flat (0.0%) while the year-over-year pace is forecast to decline to 6.5% from 7.1% in November. The other inflation-related data point will come from the University of Michigan survey on Friday, where the gauge of consumer inflation expectations over the next 12 months to be unchanged from December at 4.4%. Central bank speakers will also be in the spotlight, with an appearance from Fed Chair Powell on Tuesday. Other Fed speakers include Bostic (Monday) and Harker and Bullard on Thursday. Fourth quarter earnings season will also begin to come into focus with 9 members of the S&P 500 expected to release results. Amongst this group are banking giants Bank of America, Wells Fargo, JP Morgan, and Citigroup.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.