Weekly Macro Minute

GuideStone Reflections

After Jesus was born in Bethlehem of Judea in the days of King Herod, wise men from the east arrived in Jerusalem, saying, “Where is he who has been born king of the Jews? For we saw his star at its rising and have come to worship him.”

Matthew 2:1 – 2 (CSB)

Of all the Christmas narratives, the story of the wise men’s visit to the baby Jesus in Bethlehem has arguably captured people's imagination more than any other. But despite what our carols, Nativity scenes and pageants tell us, we know very little about them. All the text tells us is that there were at least two of them (not necessarily three), they came from the east (which could have been anywhere from Arabia, Babylon or Persia), and they brought gifts to the Christ child (gold, frankincense and myrrh). We're not even sure when they got there. Most scholars agree they were late for the baby shower, arriving months after Jesus’ birth. Even the title we give them, “wise men,” is slightly off. The term Matthew uses in Greek is "magi." In ancient times, magi were a caste of pagan magicians and astrologers.

Now astrologers and magicians are the last people you would expect to be privileged by God to receive notification of the birth of his Son. After all, the Old Testament tells us that God despises such things. He doesn’t want people to believe that the stars control their destiny or that mystic, celestial forces can provide guidance. And yet he spoke to these Magi in a language they could understand – an astronomical phenomenon. They had their eyes pointed to the night sky, locked in their profane craft, and God said, “Come see my Son.” And once the magi found the Christ child, they did the only right thing to do – they worshiped him. They went from seekers of the truth to worshipers of the Truth.

God speaks to people in ways that they can understand to reach them where they are. It’s his divine accommodation. He accommodates people by getting down on their level but never leaves them there. He brings them up into fellowship with him. Anybody can become a worshiper of Christ, from a first-century astrologer to a twenty-first-century post-modern skeptic, because God accommodates himself to us. The greatest demonstration of this was that first Advent when he took on humanity. He met us where we were in our sinful humanity to remake us into worshipers of him.

In the Economy

U.S. equities sold off on the week as better-than-expected economic news increased the likelihood of a more hawkish Federal Reserve. The services component of the economy remains robust, with an upside surprise reading of 56.5 (up from 54.4) reported for the Institute of Supply Management (ISM) Index on Monday. The preliminary December reading for the University of Michigan Sentiment Index climbed back above 59 on plentiful jobs and falling gas prices (a drop of 13% in November) but remains severely depressed and consistent with recessionary conditions. Coupled with an upside surprise to the strength of inflation in the Producer Price Indexes (PPI), this week highlights the significant work remaining for the Fed to anchor inflation back at 2%. Core U.S. PPI (ex food and energy) rose 0.4%, double consensus estimates. Thus, while inflationary pressures as measured by producer prices are quickly abating (the annualized rate has gone from a year-over-year peak of 9.7% in March to 6.2% year-over-year in November), it’s not clear at all that this means it’s headed to 2% anytime soon. With the labor market remaining too tight, good economic news is bad for risk assets (as we have noted previously) because it’s not what the Fed needs or wants. The Fed must engineer a slowdown in aggregate demand – likely through a recession – to potentially bring inflation down to its target level. Inflation is still running too hot with some stickier components making the Fed’s job more difficult. Every time economic data surprises to the upside, it only increases the likelihood that the Fed will stay restrictive for longer. Paradoxically, the market continues to price in rate cuts for next year without acknowledging the significant economic weakness that would highly likely need to occur for that to happen. The inevitable decline in corporate earnings that comes with a recession has yet to be priced in.

Shares in Europe fell modestly compared to the U.S., but on similar fears of tighter monetary policy and recession risks. A spate of colder weather also buoyed concerns around energy supplies. Internationally, China stole the spotlight as stock markets continued their impressive run higher on improved sentiment surrounding re-opening from harsh COVID lockdowns. Specifically, Chinese officials announced a 10-point guideline last week that included at-home quarantines and reduced mass testing requirements. While this is a significant and necessary step, concerns linger about the effects of such a rapid policy shift. Specifically, some epidemiologists are predicting mass infections and rising deaths that could severely interrupt business activity in the near term, given the vulnerabilities of their health care system.

Across the Markets

• The S&P 500® Index declined over 3.3% on the week.
• Defensive sectors, including utilities, real estate and health care, performed the best, while more cyclical sectors like energy, communication and consumer discretionary sectors led markets lower.
• Energy stocks also fell sharply as oil prices tumbled over 11% globally, leaving crude oil prices at their lowest since January.
• U.S. Treasury yields ended the week generally little changed and deeply inverted but saw significant intra-week volatility as the 10-year Treasury tumbled as low as 3.41% but ended at 3.57%.
• The Atlanta Fed’s GDPNow model estimate for U.S. real GDP growth for the fourth quarter of 2022 picked up to 3.2%, remaining well above consensus.