April 14th, 2023
Equities posted another winning week as signs of slowing economic growth fanned investors’ hopes that the Federal Reserve could soon conclude its rate tightening campaign. Last week’s jobs report showed a steadying jobs market with 236K added to the payrolls in March, down from 326K new hires in February and 472K in January. Inflation continued its downward trend with consumer prices increasing only 0.10% month-to-month in March, bringing the YOY overall increase to 5%. This is the lowest increase in consumer prices in nearly two years. Producer prices, a rough indicator for future consumer prices, actually fell -0.50% in March. While prices might be moderating, they still remain elevated, and higher overall borrowing costs resulted in retail sales tumbling by -1.00% in March. Signs of slowing economic growth came as the Q1 earnings season kicked off with financial giants JPMorgan, BlackRock, and Citigroup reporting better than expected results. The positive reports provided a shot in the arm to the embattled banking sector following the collapse of Silicon Valley Bank, Signature, and Credit Suisse last month. They also set a positive tone at a time when overall forecasted earnings are expected to fall -5.00% for the quarter. The S&P 500 slipped slightly on Friday but still managed to finish the week higher by 0.80%.
Rates Putting on the Brakes
While monetary policy takes time to work, recent data is increasingly showing the Fed’s rate hikes starting to slow things. The overall Consumer Price Index (CPI) rose just 0.10% in March, down from February’s 0.40% rise. A -4.60% drop in prices at the pump and a -0.30% decline in the cost of food helped drive down the overall inflation figure. However, core prices, which exclude energy and food, continued to move higher, rising 0.40% last month or 5.6% YOY. Within the core, services prices showed particular strength, driven by a 0.60% increase in the cost of shelter and a 1.40% rise in the cost of transportation. Shelter costs are a lagging indicator, however, and are expected to cool in the months ahead. Demand for services could cool further if consumers become more cautious in anticipation of a slowdown, as recent retail sales data suggests. March retail sales declined a whopping -1.00% as the combination of affordability and economic wariness began to sunk in. This is retail sales’ fourth drop in five months. The decline was driven by a drop in auto and gasoline sales, down -1.60% and -5.50%, respectively. Excluding autos and gas stations, retail sales were still down -0.30% as sales fell in most major categories, including home centers, electronics stores, and department stores. Bars and restaurants, the sole service category in the retail sales report’s composition, did manage to rise 0.10%. That modest increase, however, suggests consumers are not feeling particularly celebratory.
The Dallas Art Fair kicks off next week, an event to which we are proud to be a supporter – albeit a very modest supporter. In reviewing the various event locations, the galleries that will be involved and the artists that will be exhibiting, it had us thinking about art and how people interpret things more generally. The magic in art is in how two people can look at the same piece yet somehow walk away with completely different impressions. This week’s economic data provided its own opportunity for dual interpretation. CPI, particularly the headline figure, was well received by investors, who believe that the anemic month-over-month price gains all but assure the Fed’s next hike will be its last. Investors took a similar view of the retail sales report. This perspective, however, failed in our minds to consider the far more meaningful core reading, which actually ticked higher from February, and the fact that the quarter’s overall real consumption growth will still be close to 4.5%. The Fed may have nodded to being amenable to a pivot in the midst of last month’s mini-banking crisis, but with the frenzy of that now behind us, Fed officials are back on message pointing to stronger than expected economic activity and stubbornly high inflation while flat-out telling markets that rates will be higher than they’ve anticipated. Markets are likely correct in that the worst is probably over for inflation, but the process in getting back to normal is still far from done. There is still five trillion dollars of excess cash in the economy today relative to pre-pandemic levels even once you control for the natural growth in money supply (M2 – currency, savings deposits, money markets and small deposit accounts) and the sharp contraction in M2 since the start of the year. A quick Fed pivot would only serve to reignite the pricing pressures the central bank appears to have tamed. The next two weeks will be slow from a data standpoint, which means that the focus will be on earnings and investors continuing to formulate new interpretations to bolster their pivot case.
The Week Ahead
Q1 earnings continue to hit the street as the housing market comes in focus. Homebuilders had been pulling out all the stops to entice prospective homebuyers amid rising rates. However, housing starts look set to wane as the Federal Reserve’s monetary tightening and stricter lending standards in the wake of the Silicon Valley Bank and Signature Bank collapse prompt banks to rein in their lending. Meanwhile, existing homeowners have been sitting on much needed supply for some time as they await a rebound in prices. With mortgage rates retreating in recent weeks and the historically busy homebuying season upon us, they may be more inclined to list their homes. We’ll see if that was the case as we pour over the latest existing home sales figures.
Probity Advisors, Inc. 2023 Planning Guide Now Online
In our mission to be your trusted advisor, Probity Advisors, Inc. is providing a 2023 wealth planning guide to help clients plan and adapt to the continuously evolving estate and wealth management environment.
The guide addresses retirement planning structures and tools, highlights critical (often overlooked) components of estate plans, and provides information about important financial topics you may want to discuss with your advisor. It is designed to enhance client/advisor collaboration and overall communication. It’s not a substitute for in-person meetings with our office, but instead empowers clients to initiate and steer discussions with family members and with advisors. Clients become more informed participants in their financial future — and more successful.
Below are some of the topics addressed in the guide:
- Changes affecting retirement plans as a result of the Secure Act 2.0 that went into effect in January 2023
- Legislation affecting estate and retirement planning as well as wealth transfers to future generations
- Guidance for household budgeting and finding a system that works for you
- Tips to prepare for natural disasters and emergencies
- Strategies for introducing conversations about money at home and raising financially smart kids
- Detailed Financial Wellness Checklist to help ensure you are on track to achieving your financial goals
The guide is available on our website here or click the image below. Our clients will receive a copy of the guide in the mail. If you are not a client of Probity Advisors, Inc. and would like a copy of the guide mailed to you, please call our office at (214) 891-8131, and feel free to reach out to us with any questions, comments, or concerns about your financial life.