WEEKLY MARKET SUMMARY

Global Equities: Stocks were mixed as previously delayed economic data trickled in, with the S&P 500 ending the weekly session relatively flat with a 0.1% gain. Concerns over artificial intelligence valuations once again pressured growth stocks, pulling the Nasdaq Composite down -0.6%, while the Dow Jones Industrial Average fared better with a 0.5% weekly gain. Despite optimism over the Fed’s rate cut, US small cap stocks slipped -0.9% during the week. Foreign developed markets ended the week higher, gaining 0.7%, while emerging markets were also higher on the week, up 0.5%.

Fixed Income: It was a volatile week for rates as the 10-Year Treasury yield posted a steep drop from near 4.2% to 4.1% in response to cooler-than-expected inflation data. Rates bounced back quickly, however, to 4.15% as bond market investors expressed skepticism over the data. The 10-Year Japanese government bond yield eclipsed 2% for the first time since 1999 as the Bank of Japan raised its key interest rate to 0.75%, the highest in 30 years.

Commodities: US West Texas Crude prices ended the week at $56.65 a barrel as American ships amassed off the coast of Venezuela in an attempted blockade of oil shipping lanes. The US seized a Venezuelan oil tanker and President Trump demanded the return of oil rights to American companies which had gradually been lost over decades as Venezuela nationalized the petroleum industry. Gold prices ended the week slightly higher at $4,368/oz while silver shot up over 7% to a record level of over $67/oz.

WEEKLY ECONOMIC SUMMARY

CPI Draws Scrutiny: Investors received shutdown-delayed inflation data as the Bureau of Labor Statistics released the November Consumer Price Index (CPI), but the data was greeted with skepticism due to many missing line items that resulted in a much lower rate of inflation than was anticipated. The report showed inflation falling to 2.7% annually, well below the estimated 3.1%. The main driver of the light inflation reading was the shelter component, which accounts for 40% of the CPI calculation and was listed at a 0% rate of inflation for October due to missing survey data. While flat shelter inflation is at odds with BLS methodology, it is in line with more real-time rent data from Zillow, Apartmentlist.com, and other private sources. However, this privately sourced data reflects the “spot market” of new leases, which are just 10-13% of the rental market as opposed to the typical BLS surveys which measure all leases. Since most leases are for 12-month periods, the official BLS data typically lags the spot market and has reflected a higher rate of inflation. 

Jobs Data: The November employment report showed 64,000 jobs added during the month, better than the expected 40,000. The news wasn’t all good, however, as October’s 119,000 job gains vanished in a revision to a loss of 105,000 jobs. Furthermore, Powell and other Fed members have cautioned that they believe the BLS jobs data methodology to be flawed and overstating monthly jobs by approximately 60,000. The unemployment rate rose from 4.4% to 4.6%, as government workers were purged via DOGE cuts and voluntary resignations.

End of the Yen Carry Trade? The Bank of Japan raised its key interest rate during the week to curtail persistent inflation, pushing Japanese yields to levels not seen in decades. The move sparked concerns that investors will unwind an estimated $1-$2 trillion of positions in the longstanding “carry trade”, which involves borrowing in low-interest-rate yen and investing in higher-yielding assets denominated in other currencies such as the US dollar. Thus far, a mass exodus from the carry trade has not materialized, but further rate hikes from the BOJ could reignite those fears.

CHART OF THE WEEK

The Chart of the Week shows the number of Federal employees over the last decade, highlighting the steep decline that contributed to the higher-than-expected unemployment rate of 4.6% in the November jobs data. While President Trump touted the reduction in Federal workers as a positive for the economy, there is risk of a ripple effect on the private sector. Typically, reductions in federal staffing often trigger layoffs among government contractors and other local businesses, and the relative stability of government employment is not easily replaced by private employment.