Stocks and bonds were in harmony for the data-heavy month of January. The risk-on sentiment was driven by key economic data reports that garnered investors’ hopes for a dovish tone out of the Fed. All bets have been placed for a soft landing.
The aggressive rate hikes and action of the central bank have led to signs of decelerating inflation. The employment cost index— a measure of wage increases— came in lighter than expected. The personal consumption expenditures price index— the preferred inflation measure of the Fed— grew at the lowest rate since September of 2021. The US economy grew faster than expected in the fourth quarter of 2022 with GDP coming in at 2.9%.
The data-dependent central bank continued on its path to lower inflation from excessively high levels by raising rates another 0.25%, down from the previous hikes of 0.50%-0.75%. The federal funds rate is now 4.5-4.75%. This move was largely priced into the market already and it seems investors are more optimistic than Tommy in the famous Bon Jovi song, Livin’ on a Prayer. This is despite Jerome Powell saying their focus is not on “short-term moves.”
Global markets blissfully rejoiced as the economic data rolled in during January and finished on a high note, up 7.2%. foreign developed and emerging markets fared better than the domestic large-cap stocks, coming in at 8.1%, 7.9%, and 6.3% respectively.
Bond markets joined in the chorus as the yield on the 10-year treasury finished at 3.40%, down from 3.88% at the end of 2022. Bond prices rise as yields fall. The US bond index was up over 3% in January.
The U.S. Dollar closed out its fourth consecutive monthly loss, down 1.57% for January. The dollar has devalued significantly in recent months as the pace of rate hikes slowed. This has been a tailwind for gold and other precious metals with gold finishing up 6% for the month.
Corporate earnings are rolling in and they are a bit off-key. Despite several large disappointments, the recent signs of falling inflation and encouraging data have helped offset any losses from earnings. All eyes remain on the economic data and whether good economic news translates to good news for the markets.