The best news last week was a positive December jobs report showing 223,000 new payroll jobs and a drop in the unemployment rate to 3.5%, a 50-year low, along with a slowing pace of average hourly earnings growth in December.
- Average hourly earnings growth slowed to 4.6% y/y in December, a plus for the Fed deliberations later in the month and the catalyst for the stock market closing up 1.4% for the first week in January.
- The household survey measure of employment rose by 717,000, after slowing and diverging from the employer survey over the past six months. Even with an increase in labor force participation (also good news), this was enough to push the unemployment rate back down to 3.5%.
- The FOMC minutes of its December meeting released last week confirmed the Fed’s commitment to do whatever it takes to wring out inflation. The lower wage growth and any further slowing in CPI inflation due out this Thursday will be important data.
- The further decline in energy prices over the final few weeks of last year, combined with another more modest increase in core prices, means that headline CPI probably declined by 0.1%m/m in December.
Q4 earnings reports start this week, and analysts expect S&P 500 companies to report their first year-over-year decline since the height of the Covid pandemic in 2020 (FacSet/WSJ)
- The expected 4.1% drop in year-over-year Q4 earnings will be in striking contrast to the 31% earnings growth a year earlier.
- With Price/Earnings ratios currently in line with their 10-year 17-times average, lower earnings will make stock prices look relatively more expensive.
- So far, analysts expect S&P 500 companies’ profits to rise 4.7% in 2023 (FactSet).
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