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Navigating the Markets: December 27th, 2022

Updated: Dec 26, 2022

Merry Christmas and Happy Holidays! We hope that everyone is having a wonderful break. We have a light week ahead in terms of earnings and economic events. Remember that the stock market, bond market, and futures will be closed tomorrow (Monday).

The Week That Was ...

Last week brought us key data in the housing market, which continued to show signs of slowing, as well as PCE, which is the Fed's favorite flavor of inflation econometric data.

Headline year-over-year PCE came in a bit hotter than expected, but what really caught my attention was the durability of services-based inflation. An area that Fed Chair Powell and ECB President Lagarde have identified as being of high concern, as it tends to be more sticky and can help to drive further wage increases, which can then lead to further price increases (aka a wage price spiral).

The good news is we are seeing a healthy drop in goods inflation and a slowdown in the pace of consumer spending increases, but the bad news is that services remaining as high as they are is likely to continue to feed into more durable, structural inflationary pressure that could plague the US (and EU) into at least the first half of 2023.

The increases in services spending were driven by housing, utilities, financial services, insurance, food services, accommodations, other services, and yes, even healthcare. While we're likely to see some reprieve from housing and utilities in early to mid-2023, other areas could prove to be more sticky. A concern that has the Fed increasingly tempted to continue their "higher for longer" monetary policy mantra as they view the risk of doing too little as higher than doing too much.

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