Consumer spending still going strong
The consumer hasn’t gotten tired of spending — at least not yet. December retail sales, released last Wednesday, were strong and easily exceeded expectations. The latest consumer sentiment number also came out last week, jumping to its highest level in nearly three years. One researcher said the increase shows that consumers believe “inflation has truly turned the corner.”
Domestic stocks closed mostly higher for the week, although the Dow dropped late in the week after Boeing shares fell sharply. The fallout is mainly related to possible delivery delays as Boeing planes undergo closer scrutiny for safety issues. (The FAA really doesn’t want any more doors falling off mid-flight.) Meanwhile, only 23 companies in the S&P 500 have reported fourth-quarter earnings so far, and it’s still a bit early in the process to note any positive or negative trends. The S&P 500 closed at an all-time high on Friday, cresting well above 4,800 points.
Still, the strong economic data has created some doubt about possible rate cuts this year. By Friday afternoon, futures markets priced in a 13.1% chance of seven or more rate cuts in 2024, well below the 61.5% chance the week before. And the chances of a rate cut in March were nearly slashed in half, going from 81% to 47.4%. Much of this decline happened after Fed Governor Christopher Waller said, “I see no reason to move as quickly or cut as rapidly as in the past.” The comment also drove up the yield on the 10-year Treasury note, which once again ended the week above 4%.
Discussion about rates will continue this week and into the next. The Federal Reserve is scheduled to meet next Tuesday and Wednesday. Although it’s not expected that they will raise rates again, Fed Chair Jerome Powell’s post-meeting comments will be closely scrutinized for clues about whether or not cuts are coming — and when they might happen.
Coming this week

• The first part of the week is light on data. We’ll see U.S. leading economic indicators on Monday, plus the Purchasing Managers’ Index (PMI) on Wednesday.
• On Thursday, the first reading of fourth-quarter gross domestic product (GDP) will be released. The forecast is for growth of 1.7%, a big decline from third-quarter growth of 4.9%. A higher-than-expected number could create some volatility for markets, which are already nervous about rate cuts not happening as planned this year.
• Other data on Thursday will include durable goods orders, retail and wholesale inventories, and new home sales.
• The latest personal consumption expenditures (PCE), personal income and personal spending reports will be released on Friday, giving us further insight into consumers’ current state of mind. Pending home sales will close out the week.

Stocks improve while inflation numbers are mixed
Stocks moved up in the first full week of trading in 2024. Several tech giants — including Facebook parent Meta and chipmaker NVIDIA — posted solid gains, even as the tech industry experienced layoffs at companies such as Discord, Audible, Google and Twitch.
The big data release last week was the latest Consumer Price Index (CPI) number, which showed inflation rose to 3.4% in December, up 0.3% from November. In total, core prices rose 3.9% in 2023. The slight increase caused stocks to waver on Thursday, but they rebounded a bit following the release of Producer Price Index (PPI) data. Wholesale prices ticked down another 0.1% in December, their third consecutive monthly decline. Declining producer prices were mostly due to lower costs for gasoline and food, suggesting inflation really is continuing to subside and that the Federal Reserve will stick to its plan to cut rates later this year.
Other data included fourth-quarter 2023 earnings from several companies, notably big banks such as JPMorgan Chase, Citigroup, Bank of America and Wells Fargo. The previously mentioned layoffs haven’t hit employment numbers yet, which were steady last week. The Labor Department reported on Thursday that 202,000 workers filed for unemployment benefits in the first week of the year, well below expectations and the lowest number in almost three months. Another 1.83 million workers filed continuing claims, the lowest level since October.
Fixed-income traders continue to be perplexed by inflation data, and the yield on the benchmark 10-year Treasury fell back below 4%. Here’s an interesting tidbit: The Federal Reserve Bank of New York’s use of reverse repurchase agreements dropped to its lowest level in 12 months last week. These “reverse repos” encourage banks to place money with the Fed, taking assets (and liquidity) from the banking system and cooling growth. This may suggest that the Fed’s program of quantitative tightening is beginning to slow and could come to an end soon.
SEC allows mainstream trading of bitcoin
Last Wednesday, the SEC approved the buying and selling of spot bitcoin exchange-traded funds (ETFs), a decision that many hailed as a “game-changer” for investors.
While the ETFs are available to mainstream investors, they aren’t for everyone. Spot bitcoin ETFs are a riskier investment due to their high volatility. There’s also no guarantee that investors will be able to sell shares quickly or at their desired price. The SEC noted, referring to these exchange-traded products (ETPs): “While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
Coming this week

• It’s another short week for markets with Monday’s Martin Luther King Jr. Day holiday. We’ll see most of this week’s action on Wednesday, including the release of import prices, December retail sales, business inventories and industrial production numbers.
• The latest initial jobless claims will come out Thursday, along with housing starts and building permits.
• Friday will include more housing market data, as the latest existing home sales numbers are released. We’ll also see the latest consumer sentiment data, which is expected to remain unchanged from last month at 69.7.
• Several Fed committee members will be on the speaking circuit this week. Traders will be listening closely for signals of what the Fed plans to do with rates in the next few months.

Could Fed’s work be working?

We rounded the corner into a new year, and stocks ended the first full week of 2023 on a high note, with each of the three major markets up more than 2% on Friday. The markets were buoyed by signs that inflation may indeed be slowing, including lower-than-expected wage growth. Friday was the best day for the Dow and the S&P since Nov. 30. The services sector also showed contraction in December, after months of steady growth, another sign that the economy may be slowing.
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Jobs reports give mixed signals
On Wednesday, the U.S. Bureau of Labor Statistics shared its latest job openings figures — showing openings were essentially unchanged at 10.5 million in November. This translates to 1.7 job openings for every unemployed worker, a ratio that the Fed would like to see continue to decline. Pre-pandemic, the U.S. was at 1.2 job openings for every unemployed worker.
Meanwhile, the unemployment rate fell further than expected, to 3.5%, and nonfarm payrolls were higher than estimated, at 223,000 jobs added for the month. While these numbers arrived better than expected, wage growth missed expectations in a sign that inflation pressures could be weakening — a positive sign for markets. Average hourly earnings were up 0.3% for December and 4.6% for the year while expectations had been for 0.4% and 5% increases.
Another positive sign for markets: Service industry activity slowed for the first time in more than 2 ½ years as demand weakened in December. The Institute for Supply Management (ISM) non-manufacturing PMI benchmark has remained surprisingly solid month after month, beating expectations in November with a score of 56.5. Economists’ expectations had been for another month of expansion in December, at 55.0. But Friday’s numbers showed lower activity — at 49.6 for December. It was the first time since May 2020 that this indicator has fallen below 50. The services sector accounts for more than two-thirds of U.S. economic activity, so this level is a noteworthy sign. Indeed, the ISM says a level that sustains under 50 can be consistent with a recession.

So, what’s the Fed to do?
After raising the federal funds rate seven times in 2022 for a total of 4.25 percentage points, it appears more increases could be on the way. Expectations are for another 0.25 percentage point increase at the Fed’s next meeting, Feb. 1. Federal Open Market Committee members indicated in their last meeting in December that they’ve seen progress in tamping down inflation but that they need more evidence inflation is on a sustained downward path. We’ll keep watching and listening.

Leadership tussle settled — after dozens of rounds
Although we say that divided government can be good for markets — when one party controls the White House and the other the Congress — because it is less likely that big spending initiatives or big changes will pass, we didn’t expect so much intra-party division. But this past week we saw infighting that led to four days of negotiations to seat a new speaker of the House. It wasn’t until a 15th round of voting late in the night Friday that Speaker Kevin McCarthy was installed. The last time it took this many votes to seat a speaker was before the Civil War.
It remains to be seen how the House will function with some deep divisions remaining among its factions and what concessions McCarthy has had to make to hold onto power. What we do know is that this is likely a further sign that we won’t see significant new government spending initiatives emerging this year, which is another good sign for continued inflation cooldown.

Coming this week

• Several Federal Reserve policymakers have speaking engagements this week, including the Atlanta Fed president on Monday and the Philadelphia and St. Louis Fed presidents on Thursday. Federal Reserve Chairman Jerome Powell will speak in Sweden on Tuesday at a symposium hosted by Sweden’s central bank. We’ll see if any notable insights are shared about the Fed’s plans going forward.
• The Consumer Price Index (CPI) for December will be released Thursday. Expectations for core CPI are that it will drop to 5.7% from its previous 6%.
• On Thursday, we’ll also get a look at initial jobless claims for the first week in January, and those are expected to rise slightly, to 210,000 from the prior 204,000.
• This week we’ll also get an early look at the University of Michigan consumer sentiment survey, a leading indicator of consumer attitudes, when its preliminary report is released Friday. How consumers are feeling can tell us a lot about where the economy is headed this year.

Finishing 2023 strong
With one more week to go in 2023, U.S. equity markets are on a winning streak. Last week got off to a strong start, as San Francisco Federal Reserve Bank President Mary Daly said in an interview with the Wall Street Journal that short-term interest rates would still be “quite restrictive” even if the Fed cuts the federal funds rate three times next year. She also noted that the Fed must be forward-looking and make sure “we don’t give people price stability but take away jobs.”
Richmond Federal Reserve Bank President Tom Barkin seemed to agree somewhat in his comments on Tuesday when he said, “We’re making good progress on inflation. I think that just makes the case to balance the perspective between both sides of our mandate, inflation and employment.”
Still, he said the Fed needs to keep the option of another rate hike on the table if inflation doesn’t continue to come down.
Comments like these have helped boost optimism that we may avoid a recession next year. And the data seems to support this outlook. The core personal consumption expenditures (PCE) index — the Fed’s preferred inflation gauge, which measures prices minus food and energy — rose only 0.1% in November. And overall PCE fell 0.1% in November, its first decline in 21 months.
Other data was also positive last week. The housing market had a little bump, with new housing starts jumping 14.8% in November. The consumer confidence index rose to its highest level since July, while durable goods orders saw their biggest increase since July 2020.
All of this has been a gift to investors during the holiday season. We’re ending the year on a much brighter note than we entered it. If someone had said on Jan. 1 that the S&P 500 would grow by 20% this year, they probably would have looked foolishly optimistic. Yet here we are, with the S&P 500 up 23%, the Nasdaq up 43% and the Dow up almost 13%. It’s proof once again of the importance of overlooking short-term market events and that staying patient usually pays off.
Coming this week

• It’s a short week, and trading will likely be light as people savor the holiday slowdown.
• Data will also be scant this week. We’ll see the bulk of it on Thursday, including initial jobless claims, advanced wholesale and retail inventories, and pending home sales.
• The bond market closes early on Friday ahead of the long holiday weekend.