Last week was set to be relatively quiet, with tech giants’ Q4 earnings, the Fed’s latest interest-rate announcement, year-end employment numbers and PCE (Personal Consumption Expenditures) inflation all in the rear-view mirror. And for the most part, it was.
The week began with investors taking profits in stocks – not surprising following an early 2023 rally that brought the S&P 500 to its highest level since September. The ongoing question for stock market investors is whether the Fed will push so hard to reduce inflation that it drives the economy into a recession. Goldman Sachs thinks the odds of that happening have fallen significantly, and cut its recession probability for the next 12 months to just 25%. The firm argues the strong labor market has significantly lowered the risk of a near-term economic slump1.
Stocks rebounded Tuesday following remarks by Fed Chairman Powell. Specifically, his utterance of the word “disinflation” (which has only just begun, he clarified) was enough to send stocks higher. Bond prices, however, dipped as Powell gave no real indication of a Fed pivot with regard to its interest rate policy2. Indeed, the market is now pricing in an 80% chance of a third 2023 interest rate increase in May, after previously calling for an end to rate hikes in March3.
Stocks reversed course again on Wednesday, as markets struggled for traction. The buzz Wednesday was all about Artificial Intelligence (AI). ChatGPT, a bot that can answer plain-text questions with convincing prose, fueled the hype. With Microsoft incorporating ChatGPT into its Bing search engine, Google was prompted to announce its own AI chatbot – Bard. But Bard flubbed its debut by providing an incorrect answer, causing Google stock to lose more than $100 billion in market value4. Don’t expect Bing to replace Google any time soon, but do expect AI to generate lots of headlines and lots of hype in 2023.
While stocks were largely directionless and ended the week slightly down, the bond market moved decidedly lower. Ten-year Treasury yields moved nearly 25bps higher during the week, dropping the year-to-date return for the Bloomberg Aggregate Bond Index to just 1.55% (bond yields move inversely to prices). Though a January rally got the bond market off to a strong start to the year, the Index has now given back more than half of its early year gains5.
This week brings results from Q4 earnings stragglers – including Coca Cola, Cisco and Nestle – but stocks will likely be driven by the CPI and PPI releases. Markets will be looking for evidence that inflation continues to trend lower, with hopes a Fed pivot arrives sooner rather than later.