The market analysts have been itching to get 2023 going so that their consensus Bear Market calls and impending recession predictions can come to fruition. The talk across the Twitterarty was that Santa was not coming to town and that we should be on the lookout for back-to-back yearly declines.
Societe Generale opened with its first market commentary stating that
The deceptively quiet start to the new year 24 hours ago quickly made place for an impressive recovery in European bond markets and double digit falls in 10y core and periphery yields. FX also comes alive this morning with the dollar fighting back from the lows.
It was a quiet start but then every week with an FOMC meeting minutes and NFP scheduled is quiet.
ADP employment figures came out today (Thursday, 5th, January 2023) and along with a revision higher from November, the December number also beat expectations.
Drilling in with an eye on the Non Seasonally Adjusted figures (below) we can see that Q4 December figures are traditionally weaker than November and that the Seasonally Adjusted change in employment data is rising into the end of the year.
So on the face of it, the ADP jobs data is relatively strong and shows no signs of recession. We have NFP numbers out tomorrow which are currently down as being expected to come in weaker than the previous month. A surprise to the upside and a revision higher for November would no doubt be US dollar positive. Just like today's ADP data.
So what about Santa?
The above chart is for the UKX (UK 100), a.k.a FTSE100. After 43 years of data, I can say that 2022 ended positively for Santa and the FTSE and was pretty close to the 4-decade average return. This year UKX closed 1.5% higher for the Santa Rally, with the 43-year average coming in at 2.08%. Price action on the 1st day back in January was great but we couldn't keep the highs. Today (3rd day of trading) we saw a new high but unfortunately, the cut-off is at the close of the 2nd day. So that was a quick 2% addition to anyone's portfolio, our attention now turns to the end of January. Legend has it that if January is bearish the rest of the year will end bearish too.
Case in point, the SPX (S&P500) had a very weak start to 2022, then ended around 20% lower 12 months later. Let's hope 2023 starts off better.
One thing that will help keep a recession at bay and hopefully mean less hawkishness from the Fed is that US Oil is back around the prices we had at the start of 2022. Holding under $80 is great for easing price increases on all goods and services and as Energy was a main component of the recession fears, this should ease that pressure significantly.
Another metric that I am going to keep a close eye on is the %number of companies within the stock indices trading above their 200-daily moving average. The chart above shows that at the time of writing, 50% of companies within the SPX are in a bull trend.
The main source of my optimism is the amount of spending in the US economy. Pretty much on the last day of 2022, President Joe Biden signed a $1.7 trillion government spending bill, avoiding a government shutdown. The bill includes funding for Ukraine and Biden's domestic priorities.
According to the White House, this bill "caps off a year of historic bipartisan progress for the American people." The bill aims to support research on cancer and other diseases, improve safety in communities, aid veterans, prioritize mental health care, increase access to healthcare for Indigenous populations, and protect pregnant women in the workplace. It also provides resources for Ukraine and includes the highest-ever funding for the Violence Against Women Act. Additionally, the bill aims to reform the Electoral Count Act in order to strengthen democracy and protect the will of the people. We also know that a lot of this money will find its way into the US economy and add to the annual budget total.
The fiscal year spending that ended in September 2022, was $6.85 trillion, which was massive but unfortunately down -13% from the previous year's spending of $7.74 trillion. With data up to December 2022, we can see that Q1 was down -9% YoY, so the US desperately needs that $1.7 trillion spent into the economy, if we are to avert a back-to-back negative year in the stock markets.
What we see above is the net spending versus the economic drag due to taxation across 12 months. I am happy to see that we're ending 2022 with deficit spending rather than balancing the books, as happened at the start of 2022. What we do not want to see is the massive drain around the April corporate tax period like we saw in 2022.
More people may be getting jobs as shown through the ADP figures today and in doing so, tax receipts would surely go higher over the long run. What we are seeing in the chart above is the big spike in taxation which drained the excess out of the savings accounts of those who received funds from the CARES act, with a reversion to the mean at the end of 2022. What we do not want to see is another big spike higher.
In the chart above, we can see that Unemployment Benefits reached 2015-2016 levels in 2022. No matter what the stock market does, if there is a recession, the Unemployment figures and especially the US Benefits will show a significant increase.
The current Eurodollar curve (blue) is looking awful, and this is a major concern. The dashed red line was the first curve I noticed which showed an inversion with the solid orange line rising to reflect the start of the Fed rate hikes. The Eurodollar curve with an inversion is shouting that there will be a policy change or disruption to the market in the near future.
When some analysts look at the Eurodollar inversion, they call for the Fed to pivot on their monetary policy. But the Fed have stated time, and time again, that they expect to keep rates higher for longer. The rate of change in rate hikes is significantly dropping as seen in the blue line above. But the interest being paid by the Fed to the US Treasury is rising exponentially. This transfer is positive for the economic outlook as it is a positive fiscal transfer.
Real GDP Growth: 3.2%
Q3 2022
Unemployment Rate: 3.7%
November 2022
PCE Inflation: 5.5%
November 2022
Core PCE Inflation: 4.7%
November 2022
Federal Funds Rate: 4.3%
January 2, 2023
The above stats show decent GDP growth, and a low unemployment rate, with inflation much higher than the Fed's target of 2%.
The AtlantaFed show that their GDPNow model is moving around the 4% growth level and if this were to come true, this would be another blow to those praying for a recession.