INFLATION EASES:  The Consumer Price Index (CPI) decreased 0.1% in December after rising by that same amount in November.  Over the last 12 months, CPI increased by 6.5%, down from 7.1% the month before. That is the sixth straight month that the annual figure has decreased.  The so-called “core” CPI, which excludes energy and food prices, and which is watched more closely by the Fed, decreased to 5.7% from 6%.  Gasoline prices fell by 9.4%, but prices of eggs rose by 11.1%.

STOCKS RISE ON SOLID CORPORATE EARNINGS AND ENCOURAGING INFLATION DATA:  If inflation decreases at a steady rate, the Fed is more likely to believe that its actions are working.  This may mean that the Fed will ease up enough to avoid a recession and tame inflation at the same time.  For this week at least, investors’ moods were buoyed by this scenario.  Added to that was the beginning of corporate earnings reports.  So far they have been solid.  Two big banks, JP Morgan and Bank of America, reported solid fourth quarter earnings.  This shows that lenders have been able to take advantage of the additional money they can make from higher interest-rate loans.  And so we continue to start the first two weeks of the year with a bit of optimism in the markets.  Let’s see what week three holds.

LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  

RESERVES GET BIGGER:  As with most businesses, banks set aside reserves to cover the potential for some negative circumstances, such as a recession.  If the future looks great, banks might not set aside as much, and if they believe the future is fraught with potential economic challenges, they might set aside more reserves.  This past week, the biggest banks in the U.S. reported their fourth quarter earnings, and they were positive.  But they are not so sure about the near future.  The four largest commercial banks in the U.S. reported that they have collectively set aside an additional $2.8 billion in reserves during the latter parts of 2022.  Even if that does not mean they are predicting a recession or a downturn of some sort, they are certainly feeling the need to be prepared.  

0.25%?:  The Fed’s next meeting concludes February 1. What is the Fed going to do?  Now that the inflation numbers moved down again, many are expecting the increase to be 0.25% instead of 0.5%.  

MORTGAGE RATES MODERATE:  According to Mortgage News Daily, the average mortgage rate for a 30-year mortgage in the U.S. peaked during the last week of October at 7.2%.  Since then they have come down steadily.  The average is now down to 6.09%.  This week, the yield on the Ten-Year U.S. Treasury note ended the week at 3.43%.  Historically, when the Ten-Year U.S. Treasury Yield is at that level, the average 30-year mortgage rate is around 5.2% to 5.3%%.  Mortgage rates may have jumped further than they should have, or lenders are expecting continuing increases is the yield.  Below you can see what has happed to the yield on the Ten-Year Treasury for the past fifty years or so.  As you can see, it consistently moved down from the early 1980s until late 2020.  Did it pop up too high in the past year, or is it going higher?  Mortgage rates are likely to bounce around for a while in this current range until this gets figured out.

EWW:  My grandson Silas just turned one.  He likes to eat. 

BAD DECISION:  I was watching Saturday’s NFL playoff game between the Los Angeles Chargers and the Jacksonville Jaguars.  When LA went ahead 24-0, I decided the game was a blowout, and I stopped watching.  You only experience the live drama of incredible comebacks if you stay tuned.  I didn’t.  Bad decision.

Have a great week!

“We must eliminate the gulf of mistrust and ignorance that keeps us from learning from each other.”  Coretta Scott King

“I don’t care about the rules; if I don’t break the rules at least ten times every song then I’m not doing my job.”  Jeff Beck

“A despairing man should have the devotion of his friends.”  Job 6:14 (NIV)

SOURCES:
INFLATION EASES:  bls.gov/news.release/cpi.nr0.htm
RESERVES GET BIGGER:  wsj.com/articles/jpmorgan-gets-a-lift-from-interest-rates-but-warns-of-mild-recession-11673612918?mod=markets_lead_pos1
MORTGAGE RATES MODERATE: mortgagenewsdaily.com/mortgage-rates

(c) 2023 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets. 
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States. 
*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets.