The Nasdaq Composite and growth-oriented sectors outperformed, as some mega-cap technology-related names, including Amazon.com, Tesla, and Microsoft contributed to the rebound. Consumer staples shares underperformed. The NASDAQ added around 4.8%, the S&P 500 2.7%, and the Dow 2.0%. The latest results mark a reversal from year-end 2022, when the S&P 500 finished down for three weeks in a row. U.S. small-cap index outperformed by a wide margin, as the Russell 2000 Index recorded a weekly return of more than 5%. Only two of the S&P 500 sectors closed with a loss health care (-0.2%) and consumer staples (-1.5%). JPMorgan Chase, Wells Fargo, and Bank of America beat consensus expectations when they released earnings Friday morning, but cautious estimates for the near term from the banks caused shares to fall in early trading.
Indices in Europe rallied for a second consecutive week, as better-than-expected economic data raised investors confided for a short and shallow recession. However, members of the ECB said that interest rates would need to rise further. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.88% higher. Germany’s DAX Index climbed 3.26%, Italy’s FTSE MIB Index advanced 2.40%, and France’s CAC 40 Index added 2.37%. The UK’s FTSE 100 Index gained 1.88%. According to first estimates from the national statistics office the German economy likely stagnated in the fourth quarter of 2022, after growing 0.4% in the third quarter. The Finance Ministry said for the full year, the economy expanded 1.9%, down from 2.6% in 2021, as the Russia-Ukraine war and surging energy costs restrained output. Eurozone jobless rate stays at record low, as unemployment remained at 6.5% in November, as expected by economists.
Equity markets in Japan gained last week, supported by weaker U.S. inflation data, and raised hopes that the U.S. Federal Reserve would slow the pace of its interest rate hikes. The Nikkei Index rose approx. 0.60%, and the broader TOPIX Index was up approx.1.50%. Core consumer price inflation in the Japan rose 3.8% year on year in December the highest it has been since 1981. Analysts speculate that the Bank of Japan could revise up its inflation forecasts and review the monetary policy at its next meeting January 18th.
In the U.S. inflation pressures ease even as hiring remains healthy. U.S. prices rose at a 6.5% annual rate in December as measured by the Consumer Price Index, that’s the smallest year-over-year increase since October 2021. Excluding food and energy costs, core inflation rose by 0.3% relative to the previous month, in line with economists’ average forecast. On the other hand, services inflation, which the Fed watches closely, did not improve, and rose to 7.5% year/year from 7.2% in November. Disinflation is unlikely to be a straight line and will require the labor-market strength to ease. Weekly jobless claims fell to a three-month low of 205,000, the University of Michigan’s preliminary reading of consumer sentiment jumped more than expected and reached its highest level since April. But even with a strong labor market and low unemployment, wage pressures have started to moderate.
The better inflation data pushed U.S. Treasury yields lower, with the yield on the benchmark 10-year U.S. Treasury falling on Friday to as low as 3.43%, its lowest level since soon after the Fed’s mid-December meeting. The price of U.S. crude oil increased to around $80 per barrel on Friday to record a weekly gain of about 8.5% approximately the same decline of previous week. The rise was driven in part due to improved demand outlook and China’s easing of COVID-19 restrictions.
According to reports flows into mutual funds and related investment products showed moderate inflows into equities and accelerating inflows into fixed income. Coming up next week, even though is shortened due to federal holiday in U.S. it will still be a busy as earnings season continues, important economic data including PPI index and Retail Sales growth are expected on Wednesday. We can also expect updates on the housing market, including December housing starts, building permits, and existing home sales.
No analysts or investors are certain that the bear market in equities finished but quite a few thinks that the worst of inflation is. Investors’ attention is shifting away from worrying about inflation to worrying about growth, owning cash or bonds seems more sensible than owning stocks. There is room for rotation to fixed income and U.S. Large Cap defensive, high quality, high yield, and low volatile equities in the short term. We remain defensive in credit, with at benchmark duration, and higher in credit quality.