MARKET VIEW WEEKLY

ECONOMIC REVIEW

• Producer Price Index (PPI) data for the month of January was released on Tuesday, and both readings exceeded forecasts substantially.

• New home sales fell 4.5% from the December’s 9-month high to 801,000 for January, which was also below forecasts of 806,000. The drop was driven by pending home sales which fell -5.7% despite forecasts calling for a 1.0% increase.

• Personal Consumption Expenditure (PCE), the Fed’s preferred measure of inflation, confirmed CPI data released earlier this month, rising 6.1% YoY in January – the highest since February 1982

How does this impact you? • Impact of Rising Rates: o Falling home sales are reflecting record high home prices and now rising mortgage rates chipping away at some of the strongest demand for real estate seen in recent years. o As the Fed prepares to address rampant inflation continuing to hurt consumers at the pump and in the grocery store (and now bleeding into the services sector) by increasing interest rates, those increases are translating to rates affecting borrowing costs, i.e., business loans and mortgages are getting more expensive, too. o Consumer sentiment as measured by the University of Michigan Index improved for the current period, but more importantly, the 5-year outlook for inflation expectations actually decreased to 3.0%, suggesting consumers are confirming bond market readings, which imply inflation isn’t permanent, and should normalize over the course of this year and the next.

A LOOK FORWARD

• Non-farm payrolls for the month of February will be released on Friday, the expectation is for payrolls to increase by 450,000. How does this impact you? • Impact of Non-farm Payrolls: o As the next move of the Fed continues to be under the microscope; if the labor market continues to make strong strides the Fed may be pressured even more to begin their hiking cycle with an aggressive start. With inflation well above the Fed’s dual mandate and now with the labor market near 4% unemployment the probability of a 0.50% rate hike in March has reached nearly 70%. As the Fed Funds rate increases this will raise other borrowing costs such as mortgages and auto loans. o On a brighter note, wages are increasing at some of the highest paces on record. Wages are expected to grow at nearly 6% on a year-over-year basis in February. Wage inflation may help offset goods inflation as pandemic pressures on supply continue to wane.

Melissa MinterMarch 7, 2022

Overview

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The year began with the government stymied by a shutdown, and ended with articles of impeachment levied against the president. In between, both domestic and global economies showed signs of slowing, all while the trade war between the United States and China loomed throughout the year. Nevertheless, investors remained relatively bullish toward stocks, pushing several major indexes to record highs.

While domestic economic growth may have slowed in 2019 compared to 2018, it showed resilience and stamina. The third-quarter gross domestic product expanded at an annualized rate of 2.1% — moderately down from 2018's 3.0% rate, yet still strong enough to outpace global economic growth by a considerable margin. Consumer spending — which accounts for about two-thirds of the U.S. economy — surged, buoyed by a strong labor market, near-record unemployment, solid wage growth, and a burgeoning stock market. All told, the domestic economic expansion continued into its 11th straight year, the longest run in U.S. history.

Last year saw trade disputes between the United States and several of its trade partners reach an accord, but the trade war with China roared. The world's two largest economies engaged in a tit-for-tat skirmish, with each country volleying tariffs on their respective imports at the expense of the exporting nation. Coincidentally, a limited deal was announced just before the holiday shopping season, with the U.S. agreeing to forgo new tariffs and China assenting to allow more U.S. agricultural imports. Further negotiations are presumed, but the relationship between the economic giants remains tenuous at best.

Not only did the ongoing trade war affect global economies, but it also impacted domestic business investment, industrial production, and exports. Part of the justification cited by the Federal Reserve for lowering interest rates three times last year was weakness in business fixed investment and exports. As of November, new orders for durable goods were down 1.3% from the same period in 2018, and business (nonresidential) investment fell 2.3% in the third quarter.

The new year begins with a strong stock market and solid economic growth. The Secure Act, passed in late December, should change the retirement planning (and saving) landscape to some extent. However, the Treasury budget deficit for fiscal 2019 (October 2018-September 2019) exceeded $980 billion — 26% higher than the 2018 fiscal-year deficit. The trade war with China may cool with more mutual concessions, or accelerate, which would continue to dampen global economic growth. The new year will begin with the impeachment process and end with November's presidential election. What happens in between is anyone's guess. Will unemployment and inflation remain low? Will stocks continue to experience growth? Will oil and gas prices moderate or surge? Will the domestic economy continue to accelerate, or suffer a setback? Can the world economy recover, or will it continue to stagnate? If nothing else, 2020 looks to be an interesting year.

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MARKET VIEW WEEKLY

Overview

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