One way to look at the past month is through the lens of the U.S. Department of Labor’s Jobs Reports from November 4th and December 2nd. Both showed a strong employment market, with increases of 261,000 jobs (Wall St. Journal, Nov. 4) and 263,000 jobs, respectively. The unemployment rate was steady at 3.7%. The November release indicated strong wage growth as well, with hourly earnings up 0.6%, the most in nearly a year (Bloomberg, Dec. 2).
In the period between the reports, the Federal Reserve tacked on another 75 basis points to the Fed Funds rate, the fourth straight rise of this magnitude, bringing it to a range of 3.75%-4.0%. On November 30, Fed Chair Powell indicated in a speech to the Brookings Institute that while the pace of the increases might slow, the end point could be higher than currently anticipated by markets (CNBC, Nov. 30). These comments suggest a terminal rate greater than 5.0%, above current market consensus.
While the jobs reports portended a continue rise in rates, other economic indicators were more mixed. Business activity weakened, according to S&P Global whose U.S. Composite PMI Index fell to 46.3 in November from 48.2 in October. Any reading below 50 suggests a contraction (Reuters, Nov. 22). In another sign of slowing, tech companies like Lyft and Twitter began to lay off workers and Amazon announced a freeze in hiring new corporate employees (Bloomberg, Nov. 3).
Stocks bounced around on the data – and on comments from the Fed – but managed to end November on the front foot, with the S&P 500 up 3.1%, the Nasdaq rising 4.4%, and the Dow climbing 700 points and entering a new bull market. It was the second month in a row of positive gains as equities have posted something of a stealth rally (WSJ, Nov. 30). In what counts as something of a surprise, the Dow Jones Index led the way on a year-to-date basis, now down just -5.3% and separating itself from the broader market to the greatest extent in nearly 100 years (WSJ, Dec. 4). It is the only one of the three major indices not currently in a bear market. The S&P is down around -15% and the Nasdaq is off -27% (WSJ, Dec. 4).
Inflation moved down, albeit slowly. The Consumer Price Index (CPI) fell from 8.2% in September to 7.7% in October, with core prices up 6.3%, below expectations of 6.5%. As expected, with any whiff of moderating inflation and a potentially slower climb in rates, markets rose sharply on the news. The S&P 500 climbed 5.5% and the Nasdaq jumped 7.4%. The Dow added 3.7% (WSJ, Nov. 10). The release of Personal Consumption Expenditures Price (PCEP) Index provided further reason for optimism. Year over year through October, the index was up 6.0% compared to 6.3% the month before (CNN, Dec. 1).
The yield on the 10-year treasury staged a dramatic retreat during the month, falling from 4.15% on November 4 to 3.5% on December 2 (Yahoo Finance, Dec. 2). The yield on the 2-year fell more modestly, declining from 4.65% to 4.28% over the same period, leaving the yield curve steeply inverted (CNBC, Dec. 4). By month’s end, this inversion was deeper than it had been in decades (WSJ, Nov. 29) and the U.S. was not alone in these circumstances – eight other countries including Germany, Brazil, the U.K., Mexico, South Korea, and Canada saw their yield curves inverted as well (Bloomberg, Nov. 28).
One consequence of the U.S. inversion: Japan began buying fewer US Treasuries, according to a story in The Wall Street Journal, as the long popular trade of borrowing dollars at short-term rates to buy longer terms bonds stopped working (WSJ, Nov. 8).
The dollar itself lost ground to a basket of international currencies during the month, with the Wall Street Journal Dollar Index falling from 110 on November 7 to 104.5 on December 2 (WSJ, Dec. 2). It was the biggest monthly decline since 2010 (WSJ, Nov. 30 ). With Chairman Powell talking about more modest rate hikes, the long bull run in the greenback may be drawing to an end.
Adding to the mixed economic picture, U.S. 3Q GDP was marked up, climbing 2.9% for the period compared to an earlier estimate of 2.6%. Consumer spending drove the revision (WSJ, Nov. 30).
Riots in China, higher taxes in the U.K.
Elsewhere around the world protests broke out in cities around China as unhappiness with that country’s Covid lockdown policies spread (Bloomberg, Nov. 28). Heading into December, President Xi and company appeared to be walking back the most draconian measures, and markets rallied (Reuters, Dec. 5). Hong Kong’s Hang Seng Index was up 27% on the month (Reuters, Nov. 27).
Commodities, too, were hit by uncertainty over the path of the Chinese economy. Prices for crude oil reached their lowest level of the year to end the month, while metals and grains also fell (Bloomberg, Nov. 28). Meanwhile, in the U.K. the government announced the largest spending cuts and tax increases in a decade (WSJ, Nov. 17).
In what has been the norm for quite some time, it was another month of conflicting signals and uncertainty. Perhaps the best gift markets could deliver around the upcoming holidays is a clearer picture of what will be in store for 2023.