The View from 5th Avenue

Week 2 of January has begun and those old habits are already starting to creep in. Dry January? A pipe dream – best case scenario the month winds up being damp. New Year’s resolutions have no doubt gone by the wayside already. Unless you’re like yours truly where past goals of learning a new language have morphed into drinking more water. It’s about being practical people. That has been a struggle for investors long before today, what with the bad is good, how good is bad narrative that’s plaguing portfolios these days.

The markets continued the trend of “bad news is good news”, with all sectors closing in the green on the back of today’s ISM data. With ISM services coming in at 49.6 (down 6.9 points), it marks the first contraction since May 2020 and was the main fuel for today’s rally. Traders seem to be taking this ISM miss and a slowing in average hourly earnings (MoM) as a sign the Fed will soon pivot from rate hikes. Yields fell dramatically with the US10y retreating to 3.563%, the DXY (-1.08%) closed below 104, and the S&P(+2.28%) pushed to 3895.

The US is currently riding the struggle bus. While the RoW enjoys a decent start to 2023 (EU/China in particular), the combo of strong labor data and persistently aggressive Fed-speak is keeping a lid on the US stocks. Only 1 sector finished in the green today –Energy, and it was simply stemming the bleeding from the past few days. Consumer Discretionary succumbed to the weakness in the last few hours of trading and even a boost from TMUS (+3.2%), thanks to a beat in postpaid phone subscriber growth (we remain unconvinced), was unable to hold Telcos higher.

Rocky terrain out there as markets look to find direction in the New Year- just as they did in the old year!.. Jittery may be a fitting description as we ease into the first week of trading in 2023. Markets getting knocked lower after the open on ISM data release and briefly touching negative territory before rallying into the afternoon where participants awaited the Dec 14 FOMC minutes release, after which, markets stumbled into the close, but ultimately managed to clock a gain on the day.

We’re back! Bright-eyed and bushy-tailed, refreshed and energized (ok maybe not quite just yet) as we turn the page on what was a difficult year for all; and that’s putting it mildly. Historical returns in the first month of the year have augured well for a full year’s performance and so this morning’s green futures were met with a bit of optimism, cautious at most though. An easing of infection waves in China and a below consensus reading on German inflation (remember it was the ECB that was largely behind the December kerfuffle) had their respective markets firmly in the green.

Markets are no longer in the holiday spirit as they fell for the third day in a row. The CPI numbers from Tuesday were not enough to push them higher into yearend as continued hawkish rhetoric for the Fed has rattled the markets. Investors saw early week gains wiped out as the SPX (-1.1%) closed in the red and below its 50d (3863). Global PMI data this morning provided no relief as all came in below surveyed estimates, adding to the argument that a recission is on the horizon.

Time for a bit of context? The forecasted funds rate for the end of 2022 at the end of 2021 was 0.9%. Point being, prognostications can change. And in a big way. But therein may lie the problem. The Fed is contending with some credibility issues due to their lagged reaction to the plague that is inflation. After a roundly interpreted as dovish speech last week, with a series of disinflationary data points that followed (PPI notwithstanding-ish), the week was set up for that narrative to continue.

Not so fast, Santa..! (*Or whatever holiday jolly figure you fancy). Markets began the day drifting marginally higher with little additional catalysts ahead of the main event scheduled for 2pm. And then!.. A slowing in pace now set in stone, shifting from a series of 75bps raises, with the Dec rate hike of 50bps coming in as widely expected and the total count for 2022 coming in at 425bps of hikes!

Investors have had today circled on their calendars since November 10th, hoping for a continuation of CPI prints that are decelerating y/y. The importance, especially ahead of the FOMC tomorrow, could be seen by the early what-if’s that had been cycled via strategy desks. One had broken down how the S&P 500 would react depending on the actual print, while others looked at previous performances on CPI days.

Investors expressed their optimism ahead of this week’s action, by buying US equities today. The S&P saw its best session in nearly 2 weeks and the CCMP/ RTY also enjoyed a day in the green, with the VIX up nearly 10%. Additionally, Oil was higher by almost 3.5%, pulling the XOP and XLE out of their 5-day losing streaks (XLE -8.4%, XOP -11.8% last week). And although Cons Disc (XLY +25bps) was dragged down by TSLA (-6.3%) initially, it was balanced out by a recovery in Amazon’s stock throughout the day (it started down approx. 1.1% and closed up +1.3%).