Weekly Macro Minute

GuideStone Reflections

And he said, “What comes out of a person is what defiles him. For from within, out of people’s hearts, come evil thoughts, sexual immoralities, thefts, murders, adulteries, greed, evil actions, deceit, self-indulgence, envy, slander, pride, and foolishness.”

Mark 7:20 – 22 (CSB)

Mark’s Gospel tells of a time when the religious authorities complained to Jesus about His disciples’ failure to wash their hands before they ate. Didn’t they understand they were defiling themselves? This was not an issue of hygiene to them but an issue of purity. Recognizing that there was evil in the world, they believed that if they made a long list of unclean things and avoided them, they would be pure. This list of unclean things to avoid went from dirty hands to certain types of people. Simply put, the Pharisees and scribes believed that goodness worked its way from the outside in. If everything around them were good, then they would be good too.

Not much has changed in two thousand years. We still live in a world that believes if we can make everything around us perfect, we’ll also be perfect. We’ve convinced ourselves that all we need are the right laws, policies or educational systems in place, and everything will be good. We're sure that the world around us is the problem. Fix that first, and then we can finally be our naturally good selves.

But Jesus was rather blunt about the human condition. Our fundamental problem is not the world around us but the heart within us. Being around wicked things does not make us act wickedly. We act wickedly because we have corrupt hearts. No matter how good everything around us may be, we cannot fix our internal problem through external means. Jesus offers us the only solution: a new heart through the power of the Gospel.

In the Economy

The first week of the year opened with a heavy economic calendar. Kicking off the period were the Job Openings and Labor Turnover Survey (JOLTS) and Federal Reserve meeting minutes on Tuesday. The JOLTS data showed that demand for labor remained high, with a slight decrease in hiring and a marginal uptick in layoffs. The minutes revealed continued focus by the Fed to pursue its dual mandate of price stability and full employment, with officials seeing higher rates for “some time” and cautioned against prematurely loosening policy. The ADP employment report was released on Wednesday. It showed a much more substantial than expected increase in December, while weekly jobless claims unexpectedly fell to their lowest level since September. The official payroll report from the Labor Department came out on Friday, which showed nonfarm payrolls increased by 223,000 in December, the smallest increase in two years. Simultaneously, average hourly earnings slightly ticked down. This combination of data led to a market surge as investors cheered the prospect that a soft landing could be engineered and that a goldilocks scenario seemed within reach – which we believe to be misguided. Lastly, the week brought Purchasing Managers’ Index (PMI) services and manufacturing data releases. The services reading fell below 50 for the first time since May 2020 as new orders dropped sharply, and the manufacturing data point fell to its lowest level since May 2020 as well.

With earnings per share (EPS) at 17.5, the market has yet to fully price in the rise in federal funds rate or a possible 10% EPS decline in 2023. (It’s important to note that the average EPS decline during a recession is 35%.) Federal funds rate movements take 12 months or more to impact the economy fully, so we continue to expect a recession in 2023-2024. We disagree with the market’s current pricing in two rate cuts this year. We’re looking for a terminal funds rate of 5.25% or higher, with the Fed holding it for a more extended period than usual. Consumer demand drives inflation, so the Fed must raise the unemployment rate by 100 basis points or more before impacting the Consumer Price Index (CPI). The market won’t bottom until the Fed finally pivots, the yield curve begins to steepen, price/earnings ratios fall, and credit spreads widen.

Across the Markets

• Global stocks ended the first trading week of the year definitively in the green, primarily boosted by a risk-on rally on Friday, coupled with light trading volume. Health Care and Materials were the sole sectors putting up a negative week.
• Chinese equities rose amid reports that Hong Kong would reopen its border to mainland China and that Beijing was considering relaxing curbs on borrowing by developers within the stressed property sector.
• Japan was one of the sole decliners for the week as investors continue to grapple with how to invest during the country’s revised yield curve control measures.
• Yields fell across the U.S. curve, with the 10-year yield down 30 basis points on the week at 3.56%.
• Oil fell throughout the week, ending just under $74/bbl.