Inflation’s impact on the stock market
Stocks can generally act as a buffer against the long-term impacts of inflation.
The Fed reduced the size of its interest rate increase last week, while indicating that more rate hikes should be expected. The shockingly strong employment report for January provided evidence that labor demand has not slowed, making the Fed’s job of significantly reducing inflation more complicated. Additionally, the January ISM surveys indicated that growth in the services sector jumped back into expansion, while manufacturing slid deeper into contraction.
January’s blowout jobs number bucked the moderate downward trend in job growth from the second half of 2022. Hear more in our podcast “Labor market too hot to handle” (18 min)”
After January’s strong reading, the contractionary reading for the ISM services index in December appears to be an outlier amid solid growth for services.
In November, the trade deficit shrank to $61.5 billion from the prior month’s $77.8 billion, as imports fell over six percent, whereas exports only declined by two percent. The trade deficit for December should widen to $68.5 billion, led by an increase in the goods deficit. The advanced trade balance showed the deficit in the goods sector rising to $90.3 billion from $83.3 billion in November. Goods imports rose 1.9 percent, after the sharp decline in November, while goods exports fell another 1.2 percent—marking the sixth straight monthly decline due to slower global activity.
With inflation rates still high, consumers are relying more on credit to pay for rising expenses for non-discretionary items. Credit card usage has picked up markedly since the end of the Covid recession even amid rising financing rates. We expect a sizeable $22 billion expansion in consumer credit in December, down just moderately from the $28 billion increase in November.
The University of Michigan consumer sentiment index for the first half of February is expected to edge down to 64.8 from 64.9 in January. The recent market rally should lift the current outlook while recession and inflation concerns reduce forward expectations. Significant uncertainty still looms regarding a moderate recession in 2023, and sentiment and expectations should remain volatile. Weakening sentiment is a downside risk for consumer spending in early 2023 as consumers prep for weaker economic conditions ahead.