ClearWater Market Commentary as of January 6th, 2023

Here is the ClearWater Market Commentary as of January 6th, 2023:

In this issue:
– Performance of Major Indices
– Market Commentary
– Last Week’s Key Economic  Events and Upcoming Events

Performance of Principle Indexes: 

S&P/TSX Composite Index
5 Day	2.13%
1 Month	-0.66%
YTD	1.91%
1 Year	-6.02%

^{As of 2023/01/06 – Source: www.marketwatch.com}

Index Performances	Last 5 Days	YTD
Hang Seng Index	8.98%	5.87%
CAC 40	5.21%	4.04%
DAX	4.41%	3.84%
Shanghai Composite	2.82%	1.86%
FTSE 100	2.49%	1.92%
S&P/TSX Composite	2.13%	1.91%
Nasdaq	1.94%	1.76%
Russell 2000	1.91%	2.40%
S&P 500	1.72%	1.86%
Dow Jones Industrial	1.54%	1.49%
MSCI EAFE	0.90%	0.76%
WTI Crude (oil)	-8.10%	-7.76%

^{As of 2023/01/06- Source: www.marketwatch.com}

Last week’s and next week’s key economic events:

US economy (S&P 500 1.72%):

• A Friday rally following an encouraging jobs report left the major indexes with a gain to start the year. The S&P 500 Index also continued to move within a relatively tight band compared with most of 2022, with the index staying between 3,764 and 3,906 since December 16. The market was closed on Monday in observance of New Year’s Day.
• The week brought a number of closely watched economic reports, and the market’s reactions seemed to signal investors’ preference for slowing growth and inflation over a robust economy—a trade-off Federal Reserve officials have made clear that they are ready to accept. 
• The S&P 500 and Nasdaq 100 both fell over 1% on Thursday morning, after payroll processing firm ADP’s tally of jobs in the private sector showed an increase of 235,000 in December, well above expectations for around 150,000 and August’s recent low of 132,000. Weekly initial jobless claims also fell unexpectedly to 204,000, their lowest level since September.
• Friday’s official payrolls report from the Labor Department appeared to turn sentiment back in a positive direction by raising hopes that the economy could be on its way to a “soft landing,” or cooling inflation without a significant recession. Nonfarm payrolls rose by 223,000 in December, the smallest increase in two years but above expectations. The separate household survey showed that unemployment fell back to its post-pandemic low of 3.5%, last recorded in September.
• Promising for investors, healthy job growth appeared to be accompanied by cooling growth in average hourly earnings, which rose 0.3% in December, a tick below expectations. November’s figure was also revised lower, helping bring the year-over-year gain down to 4.6%, its lowest level since September 2021. Providing further evidence that the wage competition for workers might be easing, the labor participation rate climbed back to its recent high of 62.3%—although it was still roughly a full percentage point below its pre-pandemic levels (the rate peaked in early 2000 at 67.3%).
• Investors could only guess how the recent data would sway the decisions of Fed officials, of course. The release of minutes from the Fed’s mid-December policy meeting on Tuesday seemed to dampen an earlier rally. The minutes observed that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”
• Some positive statements from the head of the St. Louis Fed, James Bullard, subsequently seemed to help bolster sentiment. In a presentation to a CFA conference on Thursday, Bullard noted that “due to front-loaded Fed policy during 2022, market-based measures of inflation expectations are now relatively low” and had returned “to a level consistent with the Fed’s 2% inflation target.”

Canadian markets (S&P/TSX 2.13%):

• Canada’s main stock index rose 1.58 percent Friday on broad-based gains while U.S. markets were all up by more than two percent, as part of a relief rally. 
• The S&P/TSX composite index was up 307.67 points at 19,814.51.
• New employment data on both sides of the border, while still elevated, gave investors some hope. Canada added a surprise 104,000 jobs in December and the unemployment rate decreased to five percent, while unemployment also went down in the U.S.
• Though at first glance the employment data out of Canada and the U.S. was nothing for investors to celebrate given concerns about what the labour market means for inflation and interest rates, a closer look at the numbers shows that even as unemployment continues to be high, wage growth slowed somewhat, sparking optimism that a wage-price spiral might be avoided.
• Further rate hikes were already a certainty in the U.S. and Friday’s data cemented the likelihood of a rate hike in Canada in January, but investors seemed to take the numbers as a win-win for the month and perhaps even a sign that a recession isn’t quite as imminent as some thought. The path for a so-called soft landing, although narrow, is still a possibility. 
• The Canadian dollar traded for 74.15 cents US compared with 73.72 cents US on Thursday.
• The February crude contract was up 10 cents at US$73.77 per barrel and the February natural gas contract was down a penny at US$3.71 per mmBTU.
• The February gold contract was up US$29.10 at US$1,869.70 an ounce and the March copper contract was up nine cents at US$3.91 a pound.

Performance 2023: S&P 500 Sectors   

Forward P/E Ratios: S&P 400/500/600 Sectors

European and Asian economies:

• Shares in Europe surged as data indicated that the pace of inflation has slowed. The cost of natural gas also fell to levels last seen before Russia invaded Ukraine. 
• A decline in energy price increases helped push eurozone inflation below 10% for the first time in two months, official data showed. Consumer prices in December rose 9.2% year over year, below a FactSet consensus estimate of 9.7%. Even so, the core inflation—which excludes volatile food, energy, alcohol, and tobacco prices—quickened to 5.2% from 5.0% in November.
• Banque de France Governor François Villeroy de Galhau, who is a European Central Bank (ECB) policymaker, said in his new year address that interest rates would need to rise further to reduce underlying price pressures and suggested that they could peak this summer. He also said that the ECB should be prepared to leave borrowing costs at the terminal level for as long as necessary to squeeze inflation out of the system. Swap rates tied to ECB policy meeting dates are signaling that the deposit rate could peak around 3.5%.
• A final reading of S&P Global’s composite Purchasing Managers’ Index (PMI)—which measures business activity in the services and manufacturing sectors—signaled that a eurozone recession this year might be shallower than expected. 
• UK mortgage approvals fell to the lowest level in more than two years in November, as high inflation and increased borrowing costs strained household spending, data from the Bank of England (BoE) showed. 
• Croatia formally adopted the euro as its currency on January 1, becoming the 20th member of the eurozone.
• Japan’s stock market returns were negative for the week. Concerns about the global monetary policy tightening cycle and recessionary fears continued to weigh on sentiment. Investors speculated about the future trajectory of the Bank of Japan’s (BoJ’s) monetary policy, given the surprise modification to its yield curve control in late December. Meanwhile, Japanese authorities continued to emphasize the importance of seeing wage growth come through, with Prime Minister Fumio Kishida urging companies to deliver pay increases above the rate of inflation.
• The BoJ conducted unscheduled bond-buying operations to defend its newly increased 0.50% cap on the 10-year Japanese government bond yield, which finished the week at that level, up from 0.42% at the end of the previous week. Pressure on the cap reflected investors’ expectations that the BoJ would increasingly pivot away from its ultra-loose monetary policy stance. 
• With nominal wage growth in November well below consensus expectations, Prime Minister Kishida urged Japanese companies to deliver above-inflation pay increases. He warned of the risks associated with inflation outpacing wage growth, including the erosion of households’ purchasing power in an environment of low economic growth. 
• Likewise, the BoJ, through its accommodative monetary policy, aims to achieve price hikes in tandem with wage growth. The central bank believes that Japan’s economy is currently in a critical phase regarding whether it can achieve a virtuous cycle between wages and prices and that it is appropriate to continue with monetary easing and thereby firmly support the economy and realize a favorable environment for firms to raise wages.
• Chinese equities rose amid reports that Hong Kong would reopen its border to mainland China and that Beijing was considering relaxing curbs on borrowing for the ailing property sector. 
• Hopes of further support for property developers rose following news that Beijing may ease the stringent “three red lines” policy that featured prominently in the government’s crackdown on the real estate sector in 2020. China is also considering a nationwide cap between 2.0% to 2.5% on real estate commissions to boost demand.
• Separately, the People’s Bank of China announced that first-time homebuyers would be offered lower mortgage rates if new home prices fall for three consecutive months.
• The changes mark a significant shift in China’s real estate policy, following a series of measures introduced since November to restore confidence in a sector that accounts for almost a quarter of the nation’s economy. In recent weeks, the government has stepped up calls to expand fiscal spending and softened its policy stance for various industries, including internet platforms and coal imports, underscoring Beijing’s focus on prioritizing economic growth.
• In economic news, the official Purchasing Managers’ Index (PMI) data for manufacturing and non-manufacturing fell in December. Overall, the composite PMI fell to 42.6 from 47.1 in November, marking the biggest decline since February 2020, before the coronavirus outbreak. The drop in economic activity was largely attributed to the surge in infections after China abandoned its zero-COVID approach in early December. Meanwhile, data from a private survey showed China’s manufacturing, services, and property sectors weakened sharply in the fourth quarter of 2022 due to virus-related disruptions, raising the prospect that the economy may have contracted in the final months of last year.

What to watch this week:

• Consumer Inflation Expectations (Dec)
• NFIB Business Optimism Index (Dec)
• IBD/TIPP Economic Optimism Index (Jan)
• China Inflation Rate (Dec)
• CPI Inflation Rate (Dec)
• Michigan Consumer Sentiment Index – Preliminary Reading (Jan)
• U.K. Gross Domestic Product (MoM, Nov)

• 

Sources: Bloomberg.com,Yardeni.com, Barron’s.com, Factset.com and Newyorkfed.org

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