Inflationary pressures continued to abate in December, although whether the pace of decline is fast enough to put the Fed on hold in the near-term is anyone’s guess.  Fed Chair Powell and other FOMC members continued with hawkish rhetoric throughout the month, yet the 50 basis point hike in December did mark a pivot away from the four consecutive ¾ point moves.  The dramatic rise in interest rates in 2022 is no doubt beginning to seep into the broader economy and we would expect further economic weakening ahead.

Perhaps the sector hardest hit by higher interest rates has been housing.  Although New Home Sales edged up +5.8% MoM in November, Housing Starts fell -0.5%, Building Permits dropped -11.2%, Existing Home Sales were down -7.7% and Pending Home Sales were off by -4.0%.  30-year mortgage rates began the year at just over 3.00%, and finished 2022 at nearly 7%.  The S&P CoreLogic CS 20-City home price index dropped -0.52% during October, yet remains up +8.64% year over year.  Meanwhile, the National Association of Realtors Monthly Housing Affordability Index fell -33% in 2022, through October.

Prices remain the focus for both investors and Fed officials alike.  Consumer prices edged up just +0.1% in November, while stripping out the volatile food & energy components, prices rose +0.2% on the month.  On an annual basis, CPI is up +7.1%, while Core CPI has risen +6.0% (CPI topped out at +9.0% YoY in June).  Wholesale prices were a tad stickier, with PPI up +0.3% MoM (+7.4% YoY) and Core PPI higher by +0.4% MoM (+6.0% YoY).  The PCE Deflator edged higher on the month by +0.1% (Core PCE +0.2%), while annually it rose +5.5% (Core PCE +4.7%).

The 3rd reading for Q3 GDP came in stronger than expected at +3.2% (expectations were for +2.9%), with Personal Consumption rising +2.3%, versus estimates for a +1.7% rise.  Most of the Purchasing Managers surveys in November and early December suggested a U.S. economy more firmly in contraction mode, with readings coming in generally between 45 and 50 across both the Services and Manufacturing Sectors.

We begin 2023 much the same way we left 2022.  The Fed has indicated that short-term rates will rise above 5.0%, the economy is cooling, and most forecasters we read are predicting a recession in the coming 6 to 12 months.  Equity markets remain weak, while bond yields and the inverted yield curve are currently suggestive of a coming economic slowdown.  In as much as few predicted accurately the events of 2022, we remain open to multiple outcomes.  Inflation data, as well as economic growth measures should be closely monitored for evidence of future interest rate hikes.  The good news is that employment remains strong for now, likely softening any future economic downturn.

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