Wentz Weekly Insights
Pivotal Week Ahead – Inflation Data & the December FOMC Meeting

Stocks and bonds have both been trading in more of a risk-off mode over the past several days, apparent by the underperformance in stocks and the rise in bond prices. This is a slight reversal from the pattern we have seen for most of 2022 – as Treasury yields have risen (and bond prices fall) stocks have fallen also. The risk-off mindset has been due to the concern the Federal Reserve will be forced to aggressively raise rates to a level so high it would destroy demand and push the economy into a recession.
While this is still the case, the markets are shifting focus from the Fed and analyzing every single comment about policy, to the rising risk of an economic slowdown and eventual recession. Data on the consumer has supported this view – spending is slowing while credit balances are rising. Investors have bought up longer-term Treasuries, due to its perception of being the risk free asset, and to lock in higher yields over the expectation these yields will move lower when the economy falls into a recession. In a recession the Fed typically steps in to stimulate demand by lowering interest rates. If longer term rates are expected to fall in the near future, investors lock in the higher yields which pushes prices higher. Since the end of October, the 10-year Treasury bond is up nearly 6%.
This week will be important in determining the markets direction over the next several weeks. The first test will be the consumer price index on Tuesday morning. Thanks to a drop in the price of oil, the index is expected to have risen 0.3% in November, slowing from the 0.4% increase in October, but 0.4% excluding food and energy prices, which excludes oil/gasoline. The rate of inflation is coming down and that will be reflected in the year-over-year falling to 7.3% from 7.7%, which shouldn’t come as a big surprise. However, the issue is inflation is still way too high. Markets may react to the data release, and since the expectation is cooling inflation, anything higher investors may take as a negative because that means it will take more from the Fed to bring down, which means higher risk of pushing the economy into a recession.
Wednesday will be a bigger deal. The policy setting committee of the Federal Reserve, the Federal Open Market Committee (FOMC), concludes its policy meeting and is widely expected to raise rates 50 basis points (0.50%), but investors will focus on the updated summary of economic projections (SEP). The update on policymaker’s projections of economic growth, inflation, employment, and trajectory of interest rates will be the first since September and will show how high policymakers see rates going, and for how long. A hotter than expected inflation reading or a higher for longer peak rate would send a hawkish message while markets may celebrate a lower inflation reading or a lower levels of projected rates. It will also be interesting to see policymaker’s projections on growth and whether expectations on unemployment move higher.
Markets current expectation is that the Fed will stop raising rate when the policy rate (Federal funds rate) is just below 5%. This compares to the previous SEP that showed the Fed consensus saw rates peaking at 4.6%. However, a lot has happened since the September meeting, including stubbornly high inflation and a labor market that has yet to show signs of cooling. As a result, Fed members have said in public speeches they see the ultimate level of interest rates going higher than its previous forecast of 4.6%. Chairman Powell reiterated this statement in his last public remarks two weeks ago, and that is something the market continues to discount. Due to this fact, along with the number of uncertainties and higher likelihood markets will take another leg lower, we remain overweight value and defensive stocks and income producing securities.
Week in Review:
Chinese stocks saw another large move higher to open the week as it eased more of its virus testing mandates in several cities and reports emerged that it is preparing to announce additional easing of its Covid policy as soon as Wednesday as it adjusts to reflect the less serious threat of the virus. In the US, stocks fell sharply as bond yields moved higher over the concern of higher peak rates projected by the Fed at its next meeting, after a WSJ article was posted by Nick Timiraos. Outside of that it was another relatively quiet day, but the S&P 500 fell 1.79% while small caps fell a sharper 2.78%.
Stocks were lower on Tuesday as bond yields fell again, suggesting investors are in risk-off mode as the concerns over economic growth and recession risks rise. It was another quiet day, but economic data in the morning showed the trade deficit widened again in October which is a drag on GDP. Several remarks from banking execs at a banking conference caught our attention – that the consumer remains healthy, but spending is slowing and starting to see signs of stress form lower-income households. The NASDAQ underperformed for the day, falling 2.00% while the S&P 500 fell 1.44%. Also, it was announced late in the day Democrat Raphael Warnock beat Republican Herschel Walker in the Georgia runoff election for the last Senate seat, giving Democrats a 51-49 majority in the Senate.
Wednesday started with news out of China it would pivot from its zero-Covid policy and ease certain restrictions on quarantining and testing requirements, however Chinese stocks were still lower over a larger decline in exports and imports and the concern a swift reopening would lead to inflationary pressures. The 10-year Treasury yield fell to its lowest level since September at 3.40% after being as high as 4.33% in October, while stocks were mostly lower with the S&P 500 down 0.19%.
Thursday was another quiet day, but somewhat of a reversal from previous days with growth outperforming value and stocks mostly ending higher, breaking a five-day losing streak as yields rose slightly. The big news of the day was the Federal Trade Commission filing a suit to block Microsoft’s acquisition of video game developer Activision Blizzard.
Friday morning saw the producer price index rise more than expected in November, raising inflation concerns ahead of next week’s consumer inflation report, while consumer sentiment rose slightly thanks to falling gas prices. Stocks were mostly unchanged for most of the day on Friday but saw downward pressure last hour of trading to close lower by 0.73%.
Stocks snapped a three week winning streak by ending the week lower across the board. Fixed income markets saw relatively little change, but treasury yields hit a multi-week low near the beginning of the week as the 10-year yield fell to 3.40% but settled at 3.57% to end the week. Commodities were more in focus as crude oil fell to the lowest levels since last December at $70/barrel, while iron ore continued its recent rally. U.S. stocks stayed in risk-off mode and finished the week as follows: Dow -2.77%, S&P 500 -3.37%, NASDAQ -3.99%, and Russell 2000 -5.08%.

Recent Economic Data

  • Consumer’s credit balances grew by $21.6 billion, an 8.2% increase from a year ago to a new high of $4.706 trillion, according to data by the Federal Reserve. An acceleration in credit could be a troubling sign, with balances growing faster than wages and consumers dealing with higher prices as balances on revolving credit like credit cards climbs at a faster pace. Over half of the increase came from revolving credit, like credit cards, which increased $11.1 billion in the month and is 15.6% higher from a year ago. In fact, credit card balances were up 15% in the third quarter, the fastest increase in 20 years. Nonrevolving credit, like mortgages and student loans, rose $10.4 billion, or 0.2% from a year ago.
  • The ISM services index, similar to the ISM manufacturing index but this looks purely at the services sector, was 56.5, improving from 54.4 in October and 3 points higher than expected. The business activity index saw a significant increase, rising 9 points to 64.7 while new orders were relatively unchanged at 56. The report noted services businesses continue to struggle to replenish their stocks, with inventories contracting for the sixth consecutive month, leading to a 70 reading on the price index, still very high. Overall a very strong report.
  • October trade data shows the trade deficit was $78.2 billion in the month, making the deficit about $4 billion larger than in September. The higher deficit was due to exports of $256.6 billion declining by 0.7% while imports of $334.8 billion increased 0.6%. Remember, a larger trade deficit will contract from GDP.
  • Worker productivity was revised higher to a 0.8% increase (annualized), up from the first estimate of 0.3%, for the third quarter. Output was better than estimated in the first release, increasing 3.3% up from 2.8% while hours worked increased 2.5%, unchanged from the first estimate. Worker productivity is one of the big variables when it comes to longer-term economic growth, so an upward revision is welcoming. Also welcoming was unit labor costs rising 2.4% while was a downward revision from +3.5% in the first estimate.
  • The number of jobless claims for the week ended December 3 remained relatively unchanged at 230,000 with the four-week average up only 1k to 230,000. The number of continuing claims was 1.671 million, another large increase of 62k in the week, up from a recent low of 1.346 million in mid-September. The four-week average has been moving higher and stands at 1.582 million. This will be something to keep an eye on for cracks in the labor market as these numbers are the closest we have to real-time data on the labor market. For comparison purposes, continuing claims averaged around 1.800 million before the pandemic.
  • Producer price index rose more than expected with a 0.3% monthly increase in November, slightly ahead of the 0.2% increase expected. The report included an upward revision to October, with a 0.3% monthly increase, revised up from 0.2%. Producer prices have advanced 7.4% from a year ago, decelerating from the 8.0% rate in October, but still above the expected 7.2% increase. Energy prices fell 3.3% as oil continues to decline, but that was offset by a 3.3% increase in food. Core prices showed a larger increase as well, with the index excluding food and energy prices rising 0.4% in November, doubling expectations, and rising 6.2% from a year earlier, above the 5.9% expected. About one-third of the increase came from a large increase in securities brokerage, dealing, investment advice/related services, but was largely offset by a 0.9% decline in transportation/warehousing.
  • The consumer sentiment survey by the University of Michigan showed consumer’s expectation on inflation moved to a 15-month low, with the one-year ahead inflation expectation falling to 4.6% from 4.9% last month while five-year inflation expectation remained at 3.0% (still above the Fed’s 2% long-run goal). The headline consumer sentiment index rose to 59.1 in the latest survey, up from 56.8 in November. Current conditions improved slightly, to 60.2 from 58.8 while expectations rose to 58.4 from 55.6. There could be a number of reasons for the improvement, including the recent bounce in asset prices, like stocks and bonds, along with the lower price of oil and gasoline. However, the index still remains close to the lowest levels ever.

Company News

  • Large corporate layoffs are beginning to hit more than just tech companies. Last week PepsiCo said it will begin laying off hundreds of workers in its North America snacks and beverages divisions HQ. The company said the layoffs were to “simplify the organization” so it can operate more efficiently. The layoffs will be small compared to the roughly 130k employees it has in the U.S.
  • ExxonMobil said it will expand its stock buyback program to $50 billion through 2024, which includes $15 billion for 2022. Along with the news release, it said it expects to double its earnings and cash flow potential by 2027, compared to 2019 levels, and remains on track to deliver $9 billion in cost savings by the end of 2023 compared to 2019 levels. It also increased its capital spending projections to the high end of its $20-$25 billion target.
  • Southwest Airlines reinstated its dividend, with a yield of approximately 1.8%, reflecting its confidence going forward and the airline travel industry returning to a more normal operating and demand environment. It added that leisure and business revenue trends remain strong.
  • Walmart CEO said the US consumer is still stressed as they continue to deal with much higher prices, with sustained price pressures in some categories forcing consumers to prioritize purchases. It was also said that inflation is most “stubborn” in dry grocery business, including processed foods, which includes double-digit inflation that looks like it is “going to be with us for a while.”
  • The Pentagon has awarded Amazon, Google, Microsoft, and Oracle with a cloud computing contract worth as much as $9 billion through 2028.
  • In a WSJ interview, Apple’s Senior VP of software engineering said the company is working on a new data-encryption system that it says would significantly expand its practices to prevent hackers and better protect iCloud data. the new encryption system would protect data if there was a data breach and also would not be accessible to law enforcement, even with a warrant, possibly creating further tensions between the company and law enforcement. Per the WSJ, the company said the initiatives are designed to protect Apple customers from the most sophisticated attackers.
  • The Federal Trade Commission filed a suit to block Microsoft’s planned acquisition of videogame developer Activision Blizzard. The FTC is seeking to block the deal saying that it “would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.” Microsoft Vice Chair and President traveled to Washington in attempt to save the deal, while offering competitors Nintendo and Sony a 10-year guarantee for same-day release of its games.

Other News

  • There were several notable remarks at a banking conference last week from banking execs. Citi CEO gave us a preview of its quarter by saying trading revenue is expected to rise 10% in Q4 due to the volatile markets, which drove strong trading activity in October and November. Offsetting the better than expected trading results is the expectation investment banking revenue will fall 60% as M&A slows significantly from the same reason along with higher rates. CEO Fraser added she expects the US to enter a recession in the second half of 2023, adding Europe is already seeing a downturn. But it was earlier in the week on Tuesday that BAC CEO said consumer spending growth is starting to slow and consumer deposit balances were starting to come down. Wells Fargo CEO said discretionary spending is slowing and there are more signs of stress in lower-income consumers. JP Morgan CEO noted consumers still have about $1.5 trillion more in their accounts, but the spend down is slowing and it may run out by mid-2023. If there is anyone that knows consumers’ financial trends it is the banks, and overall spending growth is slowing, deposits are declining, while credit balances are growing.
  • A recent survey by the Conference Board (who organizes the monthly consumer confidence survey and index) showed 98% of CEOs expect a recession in the U.S. within the next 12-18 months. The survey shows they think a recession will be short and shallow. The Board’s chief economist said consumers are starting to worry about personal finances and job prospects and household will be first to experience the impact followed by the services sector.
  • Talks are ongoing in Congress that would attach Senator Joe Manchin’s (D-WV) recent bill to fast-track energy projects, which recently stalled in Congress, to a must pass defense bill.
  • Democrat Raphael Warnock beat Herschel Walker in the Georgia runoff election for the last Senate seat (estimated votes 51.4% to 48.6%). This gives Democrats a 51-49 majority in the Senate.
  • Arizona Senator Kyrsten Sinema says she is leaving the Democratic party and will register as an independent.
  • After days of protests against its zero-Covid policy, the National Health Commission of China said last week it will ease several Covid restrictions that were in place, including changing mandatory quarantines for high-risk buildings rather than large urban areas, easing testing requirements, and allowing those infected but with mild symptoms to quarantine at home (rather than hospitals/quarantine facilities).
  • Oil moved to a new low of the year over recession/growth concerns, uncertainty on the Russian oil price cap, and the EIA increasing 2023 production forecast to a new record high. Early reports suggest the price cap on Russian oil may have little impact on crude oil supply, with a report from the Financial Times saying Russia is taking steps to dodge sanctions by concealing the origin of its oil.
  • Global Central Bank news:
  • The Bank of Australia raised its cash rate by 25 basis points to 3.10% as was expected.
  • European Central Bank Chief Economist said there is high confidence inflation may be nearing a peak, while saying additional rate hikes are still needed. Separately, while more rate hikes are needed, some policymakers have said its policy rate is “very close” to the neutral rate. In addition, Bloomberg is reporting the ECB is likely to raise rates two more times before quantitative tightening (reduction of its balance sheet, i.e., decreasing liquidity) begins.

WFG News & Events

As an update on the Wentz Financial Group staff, please note Eryn Bruback is no longer an employee at Wentz Financial Group. Eryn had a great passion of helping clients with whatever service need they had, we appreciate her efforts and hard work and we wish her well as she moves on to another business opportunity. If there are any questions or needs, please forward those to Eryn’s replacement, Ryan Fitzgerald at rfitzgerald@wentzfinancialgroup.com or as always feel free to contact us at 330-650-2700.
Required Minimum Distributions
Individuals that have reached age 70 ½, or 72 if born on or after July 1, 1949, must begin taking Required Minimum Distributions (RMD) from retirement accounts (IRAs) by the end of the calendar year to avoid a significant penalty. It is important to initiate the RMD by the required deadline as missing the RMD can result in an IRS penalty of 50% of the amount that should have be distributed. The required withdrawal is based on the IRA balance along with life-expectancy factor based on age, which we can help calculate. We are working diligently to help all clients take their RMDs for 2022, but this is a friendly reminder the RMD applies to all traditional IRAs (in addition to SEP IRAs, Simple IRAs, and many other employer sponsored retirement plans like 401k and 403b).
Career Development Day
Monday, December 19, 2022 – All Day
*** Please note the change in the date for Career Development Day ***
Do you know someone in high school or college looking to get real life work experience from the finance industry? Wentz Financial Group will be hosting its 2nd Career Development Day at our office on December 19. The day will not only be for those looking to get a first look into financial services field but is open to any student wanting to get their feet in the door of the professional world. Don’t forget to RSVP by responding to this email or calling the office at 330-650-2700.

The Week Ahead

The next couple days will be important in determining the markets next direction for the upcoming weeks. The first test will be the consumer price index on Tuesday morning. Thanks to a drop in the price of oil, the index is expected to haven risen 0.3% in November but 0.4% excluding food and energy prices. Then on Wednesday, the FOMC concludes its policy meeting and is widely expected to raise rates 50 basis points (0.50%), but investors will focus on the updated summary of economic projections, the first since September, which will show how high policymakers see rates going, and for how long. Retail sales come out the next day, and will show if consumers maintained their strong level of spending in November. Elsewhere on the economic calendar is import and export prices on Wednesday, weekly jobless claims, the Philly Fed and Empire State Manufacturing survey indexes, and industrial production on Thursday. Friday is quadruple witching day – when four major stock futures expire – which comes with a surge in volume toward the close. The earnings calendar is light with Oshkosh and Oracle on Monday, Adobe on Thursday, and Accenture and Darden Restaurants on Friday.