The week has been a welcome break from the Fed, as the central bank went into their "blackout" period before next week's much-anticipated FOMC meeting. Investors have been forced to examine economic updates and corporate earnings (i.e., fundamentals) without being distracted from the talking heads.
This week's inspiration comes from the timeless hit "How Sweet It Is (To Be Loved By You)." The song was originally recorded by R&B star Marvin Gaye in 1965. It was written by the Motown songwriting team of Holland-Dozier-Holland, who produced 13 #1 hits in the U.S. from 1963 to 1987. James Taylor rerecorded the song in 1975 with equal success. Gaye's version peaked at #6 on the Billboard charts and Taylor's version peaked at #5. Gaye's version sold almost 1 million copies and Taylor's version sold 1.5 million.
"I needed the shelter of someone's arms
There you were
I needed someone to understand my ups and downs
There you were
With sweet love and devotion
Deeply touching my emotion
I want to stop and thank you, baby
I wanna stop and thank you, baby
Yes, I do
How sweet it is to be loved by you
Feels so fine
How sweet it is to be loved by you"
Here's what we've seen this week...
We Needed The Fed To Understand Ups and Downs. Last week proved that inflation is on the decline.
However, the Fed always hedges and claims they need to see more data on inflation dropping. Well, the Fed's favorite gauge moved lower today. The PCE Price Index for December is almost in lock-step with CPI/PPI. The PCE index has dropped 5 of the last 6 months and declined to 5.0% (year-over-year) in December.
On top of that, Personal Spending has declined for the past two consecutive months (ever so slightly). There's no reason to expect that inflation is going to turn around and skyrocket if the Fed simply takes their foot off the brakes. Housing and Manufacturing are still struggling and there's no sign the consumer will start spending like crazy just because the Fed stops raising rates.
In fact, the University of Michigan's survey of consumers showed this morning that consumers' expectations of inflation dropped for 5th consecutive month. Has the Fed ever seen a head-and-shoulders chart before? Or, in more basic language, what goes up, must come down. And, that's what we have with inflation. It was rising for 13 months before the Fed started raising rates and now inflation has dropped for 6 consecutive months with the Fed failing to stop raising rates. Maybe the Fed doesn't understand ups and downs.
Equities Didn't Need The Shelter Of The Fed's Arms This Week. On Monday, equities continued to rally after last Friday's strong results.
The first day of trading this week saw the S&P 500 Index finally cross over the 200-day moving average and it has stayed above the emotional mark all week. Similarly, the Nasdaq Composite Index is threatening to do the same after suffering losses of more than 30% in 2022. Both the Dow Jones Industrial and the Russell 2000 (small cap) indices accomplished this feat a couple of weeks ago.
It's still early, but perhaps equities are trying to tell us something about the state of the consumer and the economy. Speaking of economy, 4th quarter GDP came in higher than expected this week. Expectations were for +2.6% GDP growth in the 4th quarter and the first reading showed +2.9%. We'll see if further revisions move that number higher. Meanwhile, the Jobless Claims remain low (186,000 vs 205,000 expected) and Housing might be showing the first signs of improvement.
Weekly Mortgage Applications were up 7% this week, which is the 3rd consecutive week of application growth (1st time since June of 2022). In fact, applications have been higher in 7 of the last 10 weeks and the Mortgage Market Index is beginning to trend in the right direction. New Home Sales were higher for the 3rd consecutive month and Pending Home Sales (a leading indicator) were higher for the 1st time in 6 months. Could the Housing market be showing signs of stabilization? The bigger question is, will the Fed ruin the momentum built by equities this week or will they focus more on the "wealth effect" and try to convince us that equities should go lower? We'll have to wait until we get through Chairman Powell's press conference next week to see if equities can hold up at these levels.
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