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Resilience in jobs and wages keeps the Fed on track to keep hiking rates in December

U.S. equities were higher (+1.19%) this week, as the S&P 500 rose higher than the 200-day moving average for the first time since April. Some of this week’s better-performing sectors included communication services, consumer discretionary, and healthcare. The worst-performing sectors were energy and financials. Growth stocks outperformed their value counterparts in the S&P 500 Index, while the technology-heavy Nasdaq Composite Index posted solid gains. Stocks rallied on Wednesday after U.S. Federal Reserve Chair Jerome Powell confirmed in a speech that smaller interest-rate increases could start as soon as the Fed’s December 13-14 meeting. Powell emphasized that the Fed would continue to be data dependent, focus on the cumulative effect and rate hikes, and be closely monitoring the upcoming data. Interest rates need to remain higher for longer to fight inflation and lower it closer to the Fed’s 2% target. Officials approved rate hikes of three-quarters of a percentage point at each of their last four meetings. In US, the earning season for the 3Q22 ended. Companies in the S&P 500 posted an average earnings and revenues gain of 3.4% and 11.4% respectively over the same quarter last year, according to FactSet data. That result marked the slowest growth rate since the third quarter of 2020. For the third quarter in a row, energy was the strongest among all 11 sectors, with earnings growth of 137.0% in the latest quarter.

Comments from Fed Chair Jerome Powell drove U.S. Treasury yields lower this week. The yield of the 10-year U.S. Treasury bond tumbled to its lowest level in two and a half months, settling around 3.51% on Friday after ending the previous week at 3.69%. The fall in yields came amid continuing signs that high inflation has recently been moderating

The November jobs report was stronger than expected, with job growth showing no signs of slowing and wage growth accelerating. The unemployment rate remained at 3.7% in November. We don’t expect labor market data to change Fed’s mind from hiking rates by 50 bps at the December. We expect that wage increases will slow as the Fed continues to raise rates, inflation moderates, and the economy slows. Manufacturing continues to slow down. November’s Institute for Supply Management (ISM) manufacturing index fell into contraction territory (to 49) for the first time since the start of the pandemic. Analysts expect that the ISM manufacturing index will continue to weaken in the near term, as the underlying components that indicate growth are decreasing.

The major European index STOXX Europe 600 ended the week slightly higher by almost 50bps also affected by FEDs comments as lower inflation increased sentiment that central banks could slow the pace at which they are tightening monetary policy. Signs that China was relaxing some coronavirus restrictions also pushed sentiment. European government bond yields also fell after data showed that euro area inflation slowed more than expected in November. Comments by U.S. Fed Chairman sparked a rally in bond markets, with Italian, French, and Swiss yields also declining. In the UK, 10-year gilt yields ended little changed. The European Commission’s economic sentiment survey showed that consumers and businesses are less pessimistic about the economic outlook. Eurozone economic confidence rebounded in November from a two-year low—the first increase since February, when Russia invaded Ukraine. In addition, inflation expectations fell sharply.

Chinese stocks rose as the Fed showed signs of slowing down the pace of interest rate hikes and that Beijing was moving closer to reopening the economy after months of pandemic controls. The blue-chip CSI 300 Index increased 2.5% last week, the best week in a month.

Equity and bond market volatility will remain elevated until the future path of inflation and rates is more certain as markets become comfortable with a “data-dependent” Fed. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within U.S. equities we like sectors being defensive, with low volatility, higher quality, and shareholder yield. We remain defensive in our credit positioning, with short to at benchmark duration and higher in credit quality. We expect credit spreads to leak wider to account for recession risks.

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