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Battling Inflation: No Pain, No Gain

January 2023 Economic Review

While the labor market remains strong, recent data suggests that it could be starting to cool. The labor market has proven resilient in this high-inflation economic environment, with the December unemployment rate declining slightly to 3.5%. However, an increasing number of layoffs especially in the tech and finance sectors, in addition to a slowing in payroll growth, could indicate that labor markets are beginning to show signs of stress from increasing interest rates. The Labor Department reported that employers added 223,000 jobs in December, the smallest gain over the past two years. The current market expectation is for the Fed to continue raising interest rates over the medium term, and while the recent labor market softening doesn’t change that expectation, it creates the potential that the size of future rate increases could be lower than previously expected.

Taming inflation remains a top priority for the Federal Reserve and after a slight decline in the November inflation rate, inflation still remains high. In November, inflation declined to 7.1%, falling by 0.6% since October. The lower inflation rate was driven down in part by lower energy and used vehicle prices which offset continued price increases for groceries, apparel, and communications. Despite the recent decline, it doesn’t appear the U.S. has “turned the corner yet” according to a top International Monetary Fund official who went on to say that it’s too early for the Federal Reserve to declare victory in the fight against soaring prices. As a result of the persistently high inflation, the market expects the Fed to continue raising rates through the first half of 2023. Overall, U.S. economic activity is expected to slow in 2023 in response to high interest rates. Though uncertainty persists about the pace with which the Fed will increase interest rates as it balances combating high inflation with the potential for an economic recession.

Current Economic Releases
Data Period Value
GDP QoQ Q3 ’22 3.20%
US Unemployment Dec ’22 3.50%
ISM Manufacturing Dec ’22 48.4
PPI YoY Nov ’22 10.60%
CPI YoY Nov ’22 7.10%
Fed Funds Target Jan 9, 2023 4.25% – 4.50%
Treasury Yields
Maturity 1/6/23 12/5/22 CHANGE
3-Month 4.493% 4.171% 0.321%
6-Month 4.786% 4.700% 0.086%
1-Year 4.671% 4.719% -0.049%
2-Year 4.247% 4.387% -0.140%
3-Year 3.979% 4.118% -0.139%
5-Year 3.698% 3.778% -0.080%
10-Year 3.558% 3.574% -0.016%
30-Year 3.687% 3.584% 0.103%
Agency Yields 
Maturity 1/6/23 12/5/22 CHANGE
3-Month 4.825% 4.671% 0.154%
6-Month 4.794% 4.710% 0.084%
1-Year 4.711% 4.759% -0.048%
2-Year 4.391% 4.512% -0.121%
3-Year 4.146% 4.272% -0.126%
5-Year 3.884% 4.042% -0.158%
Commercial Paper (A1/P1)  
Maturity 1/6/23 12/5/22 CHANGE
1-Month 4.370% 4.100% 0.270%
3-Month 4.710% 4.590% 0.120%
6-Month 5.100% 5.020% 0.080%
9-Month 5.280% 5.290% -0.010%

 


Source: Bloomberg. Data unaudited. Information is obtained from third party sources that may or may not be verified. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. All comments and discussions presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.