The year 2022 came to a close with inflationary pressures largely waning, yet still extant.  The Federal Reserve remains committed to its path of higher short-term interest rates, while the consumer-led US economy remains buoyant, despite growing headwinds.  Growth prospects for 2023 look somewhat muted as corporate America deals with rising input costs and increasingly lackluster demand for goods relative to services.

The bright spot in the American economic landscape remains employment, with the reading for December joblessness coming in at a mere +3.5%.  There is ongoing debate as to oddities in the Labor Force Participation Rate, which remains a full percentage point (62.3%) below where it was pre-pandemic.  Although headlines continue to point to job cutting in the technology space, Nonfarm Payrolls rose by +223k in December, while Initial Jobless Claims averaged below +200k in January and JOLTS remains +10mm.  Across nearly every metric, employment remained strong in January.

As suggested, inflationary headwinds continued to abate in January, with headline CPI falling -0.1% in December (though +6.5% YoY), while Core CPI met expectations, up +0.3% MoM (+5.7% YoY).  Producer Prices tumbled a larger than expected -0.5% for the month (+6.2% YoY), and Core PPI rose +0.1% (+5.5% YoY).  The PCE Deflator edged up +0.1% in December (+5.0% YoY) while Core PCE rose +0.3% MoM and +4.4% YoY.

Higher mortgage rates continue to impact home price affordability, resulting in November’s -0.54% drop in the S&P CoreLogic CS 20-City Home Price Index (still +6.8% YoY).  Housing Starts dipped -1.4% in December, while Building Permits fell -1.6% and Existing Home Sales dropped -1.5%.  Mortgage Applications dropped significantly at the end of December, but have bounced back a touch in January as interest rates have pulled back a bit.

The Federal Open Market Committee concludes a 2-day meeting today (Feb 1), and markets are pricing in a +25 basis-point hike to the Federal Funds Rate.  There remains a chance for a more aggressive +50 Bp hike, which is not priced in yet and would likely be viewed as overly hawkish.  The yield curve remains significantly inverted, suggesting bond buyers are anticipating a material growth slowdown here in 2023.  Should the Fed suggest an end to hikes is near, we could see a substantial rally in risk assets, despite an already strong start to the year.  The fate of markets rests squarely in the hands of the Fed, and it’s likely we’ll see a pickup in volatility as the Fed’s war on inflation comes to a close.

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