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Weekly Market Commentary – 12/2/2022

-Darren Leavitt, CFA

The week started with concerns regarding China’s Zero Covid policy which has led to protests stemming from continued lockdowns.  Initial concerns were tempered by reports suggesting China would slowly move away from its current Covid policy, which helped to rally Chinese stocks.  That said, there is still a sense that there will be severe consequences levied on protesters, which could lead to further unrest.

Investors received their last bit of Fed rhetoric before Fed officials enter into a quiet period ahead of the December Federal Open Market Committee meeting.  Fed Chairman Jerome Powell gave a speech at the Brookings Institute that, on the margin, came off more dovish than anticipated.  The Chairman expressed that the Fed’s rate hike path has been aggressive and that much of the effects of these rate hikes are yet to be seen.  Given the lag effect, Powell suggested that it would be prudent to moderate the pace of hikes which pushed the probability of a 50 basis point hike on December 14th to nearly 80%, and also moved Terminal Rate expectations to below 5%.  Financial markets rallied significantly on the news and prompted shorts to cover their positions.

Economic data for the week was highlighted by the November Employment Situation Report.  The robust report showed very few signs that the labor market is cooling.  Non-Farm Payrolls increased by 263k, much higher than the street’s whisper number of 188k.  Private Payrolls also came in better than the consensus at 221k.  Perhaps the most important metric in the report was Average Hourly Earnings which showed an increase in wages of 0.6% versus the expectation of 0.3%.  Interestingly, wages on the services side increased by 0.8%.  Wages increased 5.1% on a year-over-year basis, up from 4.9% in October.  The Unemployment rate remained at 3.7%, near 50-year lows.  The report was initially met with a steep sell-off in the equity and fixed-income markets.  However, investors subsequently stepped back into equities, and the S&P 500 was able to regain its 200-day moving average, which seemed to provide footing for a rally in US Treasuries.

Other economic data showed mixed signs that the economy is slowing.  ISM manufacturing data came in at 49, which puts manufacturing into contraction mode for the first time since May 2020.  Conversely, the 2nd forecast of the 3rd quarter GDP showed an uptick to 2.9% from 2.7%.  PCE, a measure of inflation, showed a slight pullback in October.  The headline number came in at 0.3% versus the consensus estimate of 0.4%, while the Core number came in at 0.2, in line with expectations. On a year-over-year basis, PCE was up 6% relative to 6.3% in September, and the Core reading was up 5% versus 5.2% in the same time frame.

The S&P 500 gained 1.13%, the Dow climbed 0.24%, the NASDAQ added 2.09%, and the Russell increased by 3.38%.   Developed international markets rose 1.67% while emerging markets increased by 4.58%.  The yield curve continued to invert despite a nice rally across the curve.  The 2-year note yield decreased by nineteen basis points to 4.29%, while the 10-year yield decreased by eighteen basis points to 3.51%.  Oil prices rallied 4.8% or $3.71, with WTI closing at $80.13 a barrel.  Reports that OPEC + may reduce production this weekend after the EU agreed to a $60 price cap on Russian oil provided a bit of a floor to the commodity.  Gold prices increased by 3% or $53.6 to close at $1809.10 an OZ. Copper prices ripped higher, gaining nearly 6.5% on the week to close at $3.85 a Lb.  The US Dollar continued to weaken, with the British Pound regaining 1.229 against the greenback and the Japanese Yen moving to 134.45.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.