What happened in the markets?
Jan 31st 2023
The US market pared the overnight weakness after a sea of red in Asia and Europe and ended the session solidly in the green after supportive data. The US employment cost index moderated to 1.0% growth in Q4, a little below the forecast of 1.1%. It compares to the 1.2% pace in Q3, the 1.3% in Q2, and the all-time high of 1.4% in Q1. It is the slowest pace since Q4 2021. But the index has had a 1% handle since Q3 2021, the longest string on record going back to 1996. On a 12-month basis, ECI is edged up to a 5.1% y/y clip from 5.0 y/y previously. Risk cheered the data ahead of the FOMC tomorrow, with Nasdaq and S&P 500 adding 1.5% and 1.7%, respectively. Despite the rally, post-market close, SNAP was the later tech company to report poor earnings. The company is forecasting its first ever quarterly revenue decline, citing a flurry of changes to Snapchat’s advertising products that may be disruptive to the social media app’s business.
Revenue is projected to drop 2% to 10% in the first quarter from a year earlier, the company said in a statement. That’s below the average analyst estimate for growth of 1.48%.
The rally was broad-based as CDX IG, and HY rallied by 2.4bps and 13bps, respectively. The Treasury curve steepened as yields on the 2y and 10y declined by 3bps, while the 30y finished 2bps lower. Ahead of the much-awaited FOMC meeting, the market is pricing the Fed to raise rates by 25bps tomorrow but expecting only one more hike of 25bps after this as the terminal rate is priced at 4.91%.
In other data, the US S&P CoreLogic home price index declined -0.8% to 301.5 for the November 20-City measure after slipping -0.8% to 303.9 in October. This is the lowest level since February. The annual rate decelerated to 6.8% y/y from 8.6% y/y and has slowed from the record 21.3% y/y rate in April. As a result, XHB (S&P Homebuilders ETF) finished with a 3.6% gain.
The US consumer confidence index fell -1.9 ticks to 107.1 in January after jumping 7.6 points to 109.0 (was 108.3) in December. The present situation index improved to 150.9, the best since April, from 147.4 (was 147.2). The expectations component slumped to 77.8 from 83.4 (was 82.4). The job strength diffusion index rose to 36.9 from 34.5 (was 35.8). The 1-year average inflation gauge accelerated to a 6.8% clip from 6.6% (was 6.7%), but remains down from the record peak of 7.9% in June.
We will also see ISM manufacturing data, along with JOLTS job openings data, which has been Powell's pet metric to watch from labor market tightness perspective.