In the markets:
The major U.S. indexes finished the week mixed in a generally quiet week of holiday season trading. The Dow Jones Industrial Average added 283 points to finish the week at 33,204—an increase of 0.9%. However, the technology-heavy Nasdaq Composite had its third consecutive week of losses giving up -1.9%. By market cap, the large cap S&P 500 retreated -0.2%, the mid cap S&P 400 added 0.8% and the small cap Russell 2000 ticked down -0.1%.
International markets were likewise mixed. Canada’s TSX rose 0.3%, while the United Kingdom’s FTSE 100 rallied 1.9%. France and Germany rose 0.8% and 0.3% respectively, but in Asia, China’s Shanghai Composite plunged -3.9% and Japan’s Nikkei tumbled -4.7%. As grouped by Morgan Stanley Capital International, developed markets finished the week up 0.7% and emerging markets ended down -0.1%.
Precious metals finished the week to the upside, with Gold rising 0.2% to $1804.20 per ounce and Silver adding 0.6% to $23.92. Oil finished up for a second week in a row. West Texas Intermediate crude oil rallied 6.9% to $79.56 per barrel. The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, finished the week up 1.3%.
U.S. Economic News:
The number of Americans filing for first-time unemployment benefits ticked up last week, but remained near historically low levels. The Labor Department reported initial jobless claims rose by 2,000 to 216,000 last week. Economists had expected a reading of 220,000. Twenty-seven of the 53 states and U.S. territories that report jobless claims showed an increase last week. Only Massachusetts posted an increase of more than 1,000 (1,433). Still, the consensus view remains that rising job layoffs are a matter of when, not if. Economist Thomas Simons of Jefferies wrote, “We expect that claims are going to trend higher over time, but only gradually so.” Meanwhile, continuing claims, which counts the number of people already receiving benefits, remained basically unchanged at 1.67 million.
Sales of existing homes fell for a tenth consecutive month in November—the longest losing streak on record. The National Association of Realtors (NAR) reported existing home sales fell 7.7% to a seasonally-adjusted annual rate of 4.09 million last month. Existing home sales have dropped by nearly 37% over the past ten months which is a new record. Economists were expecting existing home sales to fall to 4.17 million. Outside of the pandemic, the level of sales activity was lowest since November 2010, at the tail end of the foreclosure crisis in the United States. Compared with the same time last year, home sales were down 35.4%. After the “easy money” pandemic boom, the drop in existing-home sales of single-family units over the past year is the largest ever recorded, breaking the record last set in 2007. The median price for an existing home fell to $370,700 in November, from $379,100 in October.
The confidence of America’s homebuilders has fallen every single month so far in 2022 and December was no exception. The National Association of Home Builders (NAHB) reported its monthly confidence index fell two points to 31 this month. Outside of the pandemic, this month’s reading is the lowest since 2012. For perspective, at the same time last year the NAHB index stood at 84. The three gauges that make up the headline index were mixed. Current sales conditions fell 3 points, while the component that assesses sales expectations for the next six months rose by 4 points. The gauge that measures prospective buyers remained unchanged. All four NAHB regions posted a drop in builder confidence, led by the South and the Northeast. However, Robert Dietz, chief economist at the NAHB noted that the report contained at least one silver lining. Dietz noted, “It is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment.” Going forward, Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, is optimistic housing is nearing a bottom. Clancy wrote in a note, “We think home sales will find a floor by the end of the first quarter, helped by the near-75 [basis point] decline in mortgage rates since late October.”
The Personal Consumption Expenditures Index (PCE), a key gauge of inflation rose, just 0.1% in November, marking a fifth consecutive month of easing price pressures after peaking over the summer. The index slowed to a 5.5% annual rate of inflation, down from 6.1% the month earlier. It was the smallest increase since October of 2021. The PCE index is rumored to be the Federal Reserve’s preferred measure of inflation, especially the core gauge that strips out volatile food and energy costs. The core index rose 0.2% last month, matching Wall Street’s forecast. The increase in the core rate of inflation in the past 12 months relaxed to 4.7% from 5%. That’s also the lowest level since October 2021. Chief economist Gus Faucher of PNC Financial Services stated, “The economy is moving in the right direction from the Federal Reserve’s perspective at the end of 2022, but not quickly enough.”
Consumers are feeling more in the holiday spirit as the pace of inflation slows and worries of an impending recession recede a bit. The Conference Board reported its survey of consumer confidence jumped to an eight-month high of 108.3 in December, reflecting fewer worries about inflation and more optimism about jobs and the economy. The closely followed index rose 6.9 points — its first increase in three months — from 101.4 in November. Economists had expected a reading of just 101.2. In the details, a measure of how consumers feel about the economy right now jumped 8.9 points to 147.2—its highest reading since early summer. A similar confidence gauge that looks ahead six months advanced to 82.4 from 76.7 and hit an 11-month high. Analysts were quick to point out that the economy isn’t out of the woods just yet. Katherine Judge of CIBC Economics wrote, “The future expectations index remains notably low by historical standards, suggesting that consumers are still somewhat nervous about what 2023 will bring.”
In contrast to the sentiment indicators reported above, the Conference Board’s index of Leading Economic Indicators (LEI) fell a sharp 1% in November, marking its ninth decline in a row and pointing to a weakening economy. The LEI is a gauge made up of 10 underlying indicators to show whether the economy is getting better or worse. The leading economic index fell last month largely because of higher jobless claims, a sagging housing market and a slowdown in manufacturing. Ataman Ozyildirim, senior director of economic research at the board stated, “The U.S. LEI suggests the Federal Reserve’s monetary tightening cycle is curtailing aspects of economic activity, especially housing. As a result, we project a U.S. recession is likely to start around the beginning of 2023 and last through mid-year.”
International Economic News:
Canada’s economy managed slight growth in October, but stalled in November according to its statistics agency. Statistics Canada reported Canada’s GDP expanded by 0.1% in October as growth in its service sector was barely able to offset weakness in goods-producing industries. The service sector has grown for six months in a row while the goods sector has contracted for four months in a row, the data agency said. While the 0.1% growth in overall economic growth in October was in line with what economists were expecting, the numbers painted a picture of an economy showing clear signs of slowing down. Bank of Montreal economist Robert Kavcic wrote in a note, “The Canadian economy has been holding up relatively well overall heading into the end of 2022, largely because the service sector is now carrying the weight. But the real question will be how things shake out during the first half of next year, when aggressive Bank of Canada rate hikes start to more fully work their way through the system.”
Across the Atlantic, the United Kingdom’s economy shrank by more than first thought in the third quarter, revised figures show. The economy contracted by 0.3%, compared with a previous estimate of 0.2%, as business investment performed worse than anticipated, the Office for National Statistics (ONS) said. The United Kingdom is now the only member of the G7 group of leading industrial countries whose output remains below its pre-pandemic levels. Gabriella Dickens, UK analyst at Pantheon Macro, said the UK’s underperformance largely reflected weakness in households’ real spending, which was 3.2% lower in the third quarter of 2022 than in the final three months of 2019. The Bank of England believes the contraction of the economy in the third quarter marks the start of a prolonged recession that will last for the whole of 2023. The chancellor, Jeremy Hunt, is planning measures in his budget to boost growth and believes the looming recession will be less severe than those in the past.
On Europe’s mainland, European Central Bank member and Bank of France head Francois Villeroy de Galhau stated the French and broader European economy should not suffer any “crash” or “hard landing”. In its long-term economic outlook, the Bank of France forecast that the French economy was set to slow sharply next year but should recover some lost ground in 2024. The Eurozone's second-biggest economy is on course to slow from 2.6% growth this year to only 0.3% in 2023. INSEE, France’s statistical agency, forecast the Eurozone’s second-biggest economy will contract 0.2% in the final quarter of this year.
Germany's finance ministry expects activity in Europe's biggest economy to remain subdued during the fourth quarter of this year and first quarter of next and sees declining inflation rates during 2023, it said in its monthly report. In an interview in the report, Finance Minister Christian Lindner said his response to Russia's invasion of Ukraine had led to higher debt levels than he would have liked. This, however, was unavoidable as a special response to challenges such as soaring energy prices was required. "Otherwise, the long-term economic damage for our country would be bigger than the burden of current debt," he said. The minister said he aimed to return to a sustainable, stable financial policy in the long term.
In Asia, the World Bank slashed China’s growth outlook for next year from 8.1% to just 4.3%. The World Bank based its reduction on China’s nearly three-year battle with the coronavirus and its “zero-COVID” economic curbs and a slump in real estate. “Economic activity in China continues to track the ups and downs of the pandemic – outbreaks and growth slowdowns have been followed by uneven recoveries,” the World Bank said in a statement. “Real GDP growth is projected to reach 2.7 percent this year, before recovering to 4.3 percent in 2023, amid a reopening of the economy.” The World Bank said that China’s economy faced significant non-pandemic-related risks, too, including the uncertain global outlook, climate change, and “persistent stress” in the real estate market amid a crackdown by Beijing on excessive lending.
Core consumer prices in Japan surged an annualized 3.7% in November marking its fastest pace since December of 1981. The surge is especially noteworthy given Japan’s notorious decades-long battle with deflation. At the same time, the Bank of Japan released minutes from its late October meeting, which showed policymakers were looking towards a shift in policy as inflation was set to rise further. Members of the BoJ’s policy board acknowledged the central bank’s longstanding dovish approach, but agreed the need to “pay attention to the side effects of monetary easing”. Earlier this week, the Bank of Japan shocked markets by expanding its yield curve control band on the 10-year Japanese government bond. It was now allowing yields on the notes to hover between -0.5% and 0.5%, from its previous band of between -0.25% and 0.25%.
Long before Russia’s invasion of Ukraine, inflation was rearing its ugly head in many facets of America’s economy. Last January, prices at the pump were already up nearly 50% from the same time in 2021. While most are aware that Russia was Europe’s main energy supplier, many would be surprised to know that the largest oil producer in the entire world is not Saudi Arabia, but the United States. The United States produces more than 20% of the world’s global oil supply. Russia and Saudi Arabia combined produce just a smidge more, at 23%. (Chart from chartr.co)
(Sources: All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.)
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