The Enigmatic 2023

Edward Nigma

I hope everyone had a happy and healthy holiday season as we will have the first full week of trading next week. The economic data over the past several weeks has been significant as the Fed tries to avoid a recession while fighting inflation through higher interest rates. Peak inflation may be in the rear view mirror but reaching the 2% inflation target may be akin to losing those last 10 pounds when you are on a diet. You need discipline and patience.

The S&P 500

The stock market hates hawkish policies and we are at the one-year anniversary of the previous all-time high. Bear markets normally take 18-24 months to play out and normally end with the Fed cutting rates and credit spreads blowing out. If the previous low in October holds then we are in for a soft landing as the Fed backs down from raising rates but that may be wishful thinking.

In the chart below, the last high (“C”) has pulled back to the 38.2% FIB at $380 which has acted as support for the past three weeks. The close after the jobs number on Friday was good but there is heavy resistance at $400 and the previous high at $410 (“C”) and those levels will need to be broken to consider the October low as a lasting bottom.

Chart of the S&P 500 by

The technical indicators at the bottom of the chart are not much help but the MACD is pointing higher. There are also many oversold stocks that could propel the market higher for a period of time so despite the downtrend in the chart above there could be another push higher into the next Fed meeting on February 1st.

The Bond Market

A good week for stocks and bond prices did better, too. So, did falling bond yields drive stocks higher this week? Possible, and if we look at the chart below it looks as though the 10Yr could get closer to 3%. However, falling yields could also warn of an economic slowdown so there is a lot of mixed signals going on right now.

Chart of the 10Yr Treasury Yield by

Let’s not forget the shape of the yield curve below which is inverted right now which indicates a recession in 2023. We did get some commentary from a few Fed Governors this week and they hinted that 5.25%-5.5% may be the terminal rate but their commentary is hard to trust these days. But 5%+ does seem very probable in the next few months. The chart below shows Friday’s yield curve (blue) verses where it was trading one month ago, FYI. You can see that most of the movement has been around the front-end as the market wrestles with Fed policy and the terminal rate.

US Treasury Yield Curve by

Ideally, we want the curve to flatten and see long rates higher than short rates to signal growth in the economy. But this is not happening right now so maybe all this means a lift higher in bond and stock prices before the Fed’s next meeting in February. Or, maybe the CPI number on Thursday will provide some clarity and direction for the markets.

Economic Data

US Average Hourly Earnings
  • Average hourly earnings rose YoY 4.6% (Forecast 5%, Previous 5.1% ,Revision 4.8%) and revisions to prior data show wage growth slowing rather than accelerating. This is what the Fed is wishing for and a rate of 3.5% to 4% would be compatible with the Fed’s 2% inflation target.
  • Nonfarm Payrolls for December came in at +223,000 which is the lowest in two years.
  • The Unemployment Rate dipped to 3.5%, tying a 53-year low, and job openings far outnumber the unemployed. The underemployment rate fell to 6.5%, the lowest on record. For clarity, the unemployment rate dropped because employment rose by 717,000 which was more than the 439,000 increase in the labor force.
Average Workweek
  • The average workweek at factories was down to 40.1 hours in December. Excluding 2020, this was the lowest level since 2010, when the U.S. economy was still emerging from a recession.
  • The December ISM Services Index reported at 49.6 fell from 56.5 and is now in contraction territory. This is the lowest level (excluding COVID) since 2009. Notable in this report is that new orders plunged by 10.8 pts to 45.2.
  • The Institute for Supply Management’s manufacturing index, also now in contraction fell to 48.4 in December.
  • According to S&P Global, Inc., credit defaults are predicted to double in Europe in 2023. The company expects the trailing 12-month speculative-grade corporate default rate to reach 3.25% by September 2023, up from 1.4% a year earlier.
  • U.S. auto sales totaled 13.7 million vehicles in 2022, the lowest figure since 2011 and an 8% decrease from 2021 according to Wards Intelligence. Sales had topped 17 million vehicles for five straight years before the Covid-19 pandemic struck in 2020, unleashing supply-chain problems that have bogged down deliveries ever since.
Auto Sales
  • Workers who stay put in their jobs are getting their heftiest pay raises in decades, a factor putting pressure on inflation. Wages for workers who stayed at their jobs were up 5.5% in November from a year earlier, averaged over 12 months, according to the Federal Reserve Bank of Atlanta. That was up from 3.7% annual growth in January 2022 and the highest increase in 25 years of record-keeping. Faster wage growth is contributing to historically high inflation, as some companies pass along price increases to compensate for their increased labor costs. (WSJ)
Paul J. McCarthy

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Paul J. McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.