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Main U.S. indexes decline, but off lows
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Real estate weakest S&P 500 sector; energy sole gainer
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Dollar, gold, up slightly; bitcoin up >2%, crude slips
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U.S. 10-Year Treasury yield edges up to ~3.85%
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MAY BE TOUGH TO SHAKE THE GOOD NEWS IS BAD NEWS CONUNDRUM
(1330 EST/1830 GMT)
Both the Index of Leading Economic Indicators and the yield
curve have the market in a bit of a fix as they flash warning
signs over where the economy might be headed.
Doug Ramsey, chief investment officer of The Leuthold Group, imagines a scenario where they both “fail,” and a recession in 2023 is sidestepped. What might the GDP growth outlook be in that scenario? "It wouldn’t be good, and (ironically) that’s because of strong labor market conditions on which the economic bulls now rest their case!" Ramsey says that Leuthold Group's Index of Unused Labor Capacity (ULC) closed 2022 at 2.1%, the lowest annual reading in its 75-year history. The ULC captures today’s combination of extremely low unemployment and contracting productivity. According to Ramsey, the year-end ULC exhibits a "reasonably high correlation (+0.56) with the following year’s real-GDP growth rate." In fact, he says that they couldn't find a higher correlation with any of two dozen measures of the yield curve. Ramsey's bottom line is: "Even a U-turn in the LEI won’t alleviate the “late-cycle” constraints captured by the ULC. To the contrary, it would aggravate them."
(Terence Gabriel)
*****
UNCERTAINTY AHEAD MEANS THAT INVESTORS SHOULD DIVERSIFY. BUT
HOW? (1220 EST/1720 GMT)
Uncertainty and cross currents in the economic outlook mean
that investors should try to diversify their investments. But
how can you do this when correlations between asset classes keep
going up?
“The last several decades of economic globalization and
financial market deepening mean that an investor today can
access more parts of the global economy with greater ease and at
lower cost than ever,” Bank of America analysts including Jared
Woodard said in a report. But, “those advances also mean that
old diversification strategies don't work as well.”
Among the problems that BofA identities - equity index
constituents are more correlated to one another, different
regions and asset classes move more in sync and Treasury bonds
don't protect against equity bear markets as easily as they used
to.
For example, when the SPY exchange traded fund was
created thirty years ago, stocks in the S&P 500 were only
10-12% correlated to each other. Today, with a few growth stocks
dominating the index, correlations are often 50%.
Meanwhile over three decades, European and US equity
correlation also rose from 31% to 79%, high yield bonds from 16%
to 81% and almost every equity sector moves more with the index.
The exceptions being energy & staples, BofA said. The problem is
it’s “all one trade.”
So, what can investors do? Bank of America says the solution
is to capture better valuations, higher income and growth
potential beyond the benchmarks.
In U.S. equities, the bank recommends equal weight indexes , high quality , and small cap value ,
which have better historical returns. In international
equities BofA says to own dividends , emerging markets
that can grow , and Canada .
(Karen Brettell)
*****
STICKY INFLATION + JOB MARKET TIGHTNESS = HIGHER TERMINAL
FED RATE? (1110 EST/1610 GMT)
A data downpour on Thursday drenched market participants
with evidence that the Fed's demand-dampening monetary policy is
starting to do just that.
But that old bugaboo inflation remains its sticky self and
the labor market shows scant signs of weakening, clouding the
horizon for any polyannas who are still expecting the Fed to
shed its hawkish feathers.
The wholesale prices U.S. companies get for their goods and services were hotter than anticipated. The Labor Department's producer price index (PPI) "final demand" figure (or, the prices consumers pay) jumped by 0.7% in January, an abrupt reversal of December's 0.2% dip and well above the 0.4% consensus. Year-over-year, the measure landed at 6%, hotter than the 5.4% projection but a cool-down from the prior (upwardly revised) 6.5% print. The core PPI measure, which strips out food, energy and trade services, posted a monthly increase of 0.6%, triple the December rate, and an annual increase of 4.5% - a 20 basis point drop from the previous month. While the data "suggests that the easy battles against price pressures have been won," John Lynch, Chief Investment Officer at Comerica Wealth Management says "implications include a steadfast Federal Reserve, with tighter policy, and for longer, than equity markets have been pricing in since October."
Intermediate demand - or business-to-business price growth - excluding food and energy, rose by 0.9% last month but has actually fallen 5.2% year-over-year. Here's a look at core PPI Final Demand and other major indicators, showing how far they have to fall before approaching Powell & Co's average annual 2% inflation target: The number of U.S. workers filing first-time applications for unemployment benefits was essentially unchanged last week at 194,000, according to the Labor Department. This marks the fifth straight week below the 200,000 level associated with healthy employment churn and offers yet another bit of evidence that the job market is tight - as if any further proof was needed after the blowout January payrolls report. Last week's number is "consistent with most other indicators which suggest that the labor market is still carrying plenty of momentum," says Michael Pearce, lead U.S. economist at Oxford Economics, and it means the Fed "on track to raise rates at its March meeting, and probably at the May meeting too." However, ongoing claims , reported on a one-week lag, actually rose by 1%, and the four-week moving average of initial claims - while still low - also ticked a hair higher, hinting at the appearance of cracks in the labor market. Groundbreaking on new U.S. residential projects dropped by 4.5% to 1.309 million units at a seasonally adjusted annualized rate (SAAR), or 3.8% fewer than expected.
Building permits , considered among the more
leading housing indicators, eked out a 0.1% increase to 1.339
million units SAAR, or 0.8% to the south of consensus.
"Housing starts were weaker than expected, dashing hopes
that housing activity may be starting to stabilize," says Thomas
Simons, economist at Jefferies, who sees implications regarding
housing sector employment.
"Backlogs are now being cleared and with fewer projects
started than completed, (and) contractors aren't going to need
as many workers," Simons adds.
At any rate, both starts and permits are now well below
pre-pandemic levels, having entirely deflated from the COVID
demand boom:
Finally, Atlantic region factory activity is taking a swan
dive this month.
The Philadelphia Fed's Business Index (aka Philly Fed) unexpectedly plunged 15.4 to a reading of -24.3,
the lowest reading since May 2020, when heads were still reeling
from shutdown shock.
The number contradicts the shallower contraction predicted
by economists and marks the index's sixth consecutive month in
contraction territory.
The report stands in contrast to Wednesday's improved Empire
State survey, together they show diminished activity in
Northeastern manufacturing.
"Manufacturing continues to face hurdles from softer demand
for goods and higher borrowing costs," says Rubeela Farooqi,
chief U.S. economist at High Frequency Economics. "But better
domestic and global growth outcomes could support activity in
the sector."
A Philly Fed/Empire State print south of zero signifies
monthly contraction.
Wall Street decided the data portends a longer than hoped
for restrictive phase in central bank policy, sending all three
major U.S. stock indexes deep into red territory.
Chips and mega-cap momentum stocks are
among weaker groups.
(Stephen Culp)
*****
INFLATION DATA SENDS STOCKS LOWER IN EARLY TRADE (1010
EST/1510 GMT)
U.S. stocks stumbled out of the starting gate on
Thursday, as the latest reading on inflation showed prices
remain stubbornly high, raising concerns the Federal Reserve may
need to be more aggressive in hiking rates to tamp down higher
prices.
The January reading of
producer prices
(PPI) rose 0.7% last month after a 0.2% decline in
December, while on a year-over-year basis, PPI climbed 6.0%,
well above expectations for a 0.4% and 5.4%. The PPI data comes
on the heels of a reading on consumer prices (CPI) earlier this
week.
A reading of initial jobless claims showed the labor market remains solid however, although a
gauge of manufacturing
in the Mid-Atlantic region unexpectedly plunged.
"Both inflation readings this week point to the stickiness of inflation and that the fight isn’t over, especially when considering today’s PPI reading was the highest month-over-month increase since early summer. And if you add in that jobless claims declined suggesting the labor market remains tight, it shouldn’t be a surprise to see the market take a breather as hopes of a dovish Fed in the coming months fade," said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office in New York. "Bottom line is investors should recognize inflation may not return to normal levels as quick as many hope, and with that may come more volatility." In the wake of the data, Federal Reserve Bank of Cleveland President Loretta Mester said the central bank could become more aggressive with rate rises in the future if inflation surprises to the upside. Below is your market snapshot:
(Chuck Mikolajczak)
*****
NASDAQ COMPOSITE: BULLISH MESSAGE IN THE BOTTLE? (0900
EST/1400 GMT)
One long beleaguered measure of the Nasdaq Composite's internal strength has recently poked its head above
water. This, as the tech-heavy index has come up for air in
2023:
The spread between the Nasdaq's cumulative net new highs (running sum of new yearly highs minus new yearly lows),
and its 12-week moving average, inflected from positive to
negative on November 26 of last year. This was just one week
after the Nasdaq's record high close on a weekly basis, and the
week of the tech-laden index's record intraday high.
After 63-straight weeks in negative territory, which was its
longest such streak since an 81-week run around the Great
Financial Crisis, this measure turned positive last week with a
+67 reading. Through Wednesday's close of this week it has now
ticked up to +360, for its highest reading since November 19,
2021.
Traders will be watching to see if this nascent bullish turn
sustains. If the cumulative net new highs on a weekly basis can
continue to trend above their 12-WMA, the Nasdaq may see a
protracted advance.
However, the measure falling back below its 12-WMA may see
the Nasdaq quickly sink again.
(Terence Gabriel)
*****
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
