Overnight bonds moved gradually lower as volume is coming back. Lower French inflation kicked off the rally in Europe. On the heels of German improvement yesterday. Also, US futures advanced with stocks as positive reports from China and data from Europe boosted risk appetite.

With inflation peaking at 9.1% in June and sliding since, a recession is now the #1 economic concern going into 2023. Of course, a) the “experts” have been talking about a recession for over a year, and b) recessions lead to lower rates. When businesses make less money due to lower consumer spending (triggered by dwindling reserves, price pressures, and an aggressive Fed), companies lay off workers and more people are hesitant to spend. Weak expectations or prior over-investing also factor into the equation, with many firms feeling that large swaths of the economy could, or are already, experiencing worsening macro forces and a series of unknown variables (war, pandemic, energy prices, etc.).

There are signs that the three big world economies (U.S., EU, and China) are all slowing down simultaneously. Even countries that are not in recession, it would feel like recession for hundreds of millions of people. But the argument against a major recession is strong. Gross Domestic Product is not negative. Many corporations haven’t cut their profit forecasts, hiring remains surprisingly robust, and the unemployment rate is sitting near historical lows at 3.7 percent. If that resilience holds up and inflation continues to cool down, a soft landing could be in the making. The Fed also won’t hike interest rates to the moon (and has even begun to take its foot off the accelerator), which could mean that somewhat of a slowdown is in store, but not one that slams the brakes on the economy. And the rise in real income is likely to be the stronger force in 2023 along with supply chains being normal.

he manufacturing economy contracted in December, according to the ISM Manufacturing Index. The index came in at 48.4, the lowest since the early days of the pandemic. If the index comes in above 50, it is expanding, while below it is contracting. The prices index fell to 39.4, which is good news on the inflation front, while employment remained in expansion territory.

Job openings were more or less unchanged in November, according to the JOLTS job openings report. The quits rate (which tends to predict wage increases) ticked up as well.

A few of the more important bullet points from the Fed Minutes:

• FED MINUTES: PARTICIPANTS WELCOMED INFLATION DROPS IN OCTOBER, NOVEMBER BUT CONCURRED IT WOULD TAKE ‘SUBSTANTIALLY MORE EVIDENCE’ OF PROGRESS TO BE CONFIDENT OF A SUSTAINED DOWNWARD PATH
• FED MINUTES: NO PARTICIPANTS ANTICIPATED THAT RATE CUTS WOULD BE APPROPRIATE IN 2023

This was the most forceful language we’ve heard regarding the “are we there yet?” song and dance with respect to how many good inflation reports it takes to change the narrative.  Even Powell himself had previously said 2 consecutive reports opens the conversation.  That’s not necessarily at odds with the Minutes here, but it’s a different takeaway for markets, to be sure.

On the topic of “no cuts in 2023,” the market disagrees, but this is par for the course as far as the Fed’s communications have been concerned.

During 2022, the Dow slipped 8.8%, the S&P 500 fell 19.4%, and the Nasdaq tumbled 33.1%. Among the 11 sectors in the S&P 500, energy gained a stunning 59% in 2022; no other sectors rose, although some came close. Utilities only fell 1%, consumer staples (think Campbell’s soup) eased 3%, healthcare dropped 4%, and industrials shed 7%. The other six sectors fell over 10%, led by communications, down 40%.  Via econ70.com