Inflation continues to move in the right direction. The consumer price index (CPI) only increased 0.1% in December compared to original expectations of a 0.3% increase and year-over-year CPI increased on 7.1% compared to original expectations of 7.3%. Furthermore, core CPI, which excludes volatile energy and food prices and which the Federal Reserve tends to watch more closely as an indicator of inflation, rose only 0.2% in December compared to expectations of 0.3%. In other words, for several months now, inflation has gradually been declining. While this would seem to indicate a trend, we are still far away from the typical 2% target, and the Fed likely has more work to do to curb inflation.
Questions about a recession have been looming over the US for nearly a year. With the Federal Reserve raising interest rates another 50 basis points, that speculation continues. Hear from our Investment Director, Jason Ray, in this recent interview with Reuters on his outlook.
Labor market remains strong despite aggressive Fed action. Jobless claims reached their lowest since September. While projections for unemployment still generally see unemployment overall increasing, the stubbornly strong labor market, coupled with improving inflation, has spurred conversation about the possibility of a soft landing where the Fed can avoid is able to leverage monetary policy just enough to curb inflation to target levels without tipping the economy into recession.
The markets are having a negative reaction to macroeconomic pressures. While the markets had a brief rally in November, it appears that bullish stance is fading. Despite generally positive inflation news, markets have reversed into a downward trend in December. As consumers are generally planning to spend less this holiday season, we’re keeping a particular eye on the consumer discretionary sector. As a broader investment strategy, we are mindful of a potential transition into longer duration bonds as the Fed becomes more dovish and are watching value equities amidst widespread value compression.