Weekly Market Update: January 23, 2023

Alex Ralicki |

Inflationary pressures have shown signs of moderating. This was evident in the Labor Department’s report on consumer prices. Specifically, the Consumer Price Index (CPI) fell 0.1% in December. The core-CPI, which excludes the more volatile food and energy components, was up 0.3% last month, in line with the consensus forecast. On a 12-month basis, the CPI and the core-CPI were up 6.5% and 5.7%, respectively. The figures, though still elevated, suggest that the Fed’s efforts to slow demand and ultimately put downward pressure on prices are working.

The CPI data came on the heels of a more-modest monthly increase in the December average hourly wage. The benign increases in consumer prices and corporate wages raised sentiment on Wall Street that, while the Federal Reserve may not pivot on the interest-rate front in 2023, the pace of increases may be more measured. The consensus is now calling for a quarter-point hike to the benchmark short-term interest rate at the Fed’s early February monetary policy meeting.

Nonetheless, the Federal Reserve has vowed to push the federal funds rate above 5.00% by midyear. This would likely include three more hikes, including the aforementioned expected increase at next month’s Federal Open Market Committee (FOMC) meeting. There also is a consensus among senior Fed voting members that the rate will need to stay above that level for an extended period to effectively fight inflation.

The ongoing fourth-quarter earnings season will indicate what impact the increasingly restrictive monetary policies of 2022 are having on the economy and Corporate America. The quarterly results from the big banks showed a resilient consumer during the holiday shopping season, but also that the banks are building up stockpiles of cash to brace for potential loan defaults on all sides of their business, including in the consumer loans and credit cards areas. Meantime, the recent economic data out of China and Europe have been weak.

Conclusion: We recommend some continued caution. With the Fed raising rates into a period of slowing global economic growth, and earnings forecasts likely to come under pressure over the next few quarters, headwinds for investors exist in the first half of 2023.