The Pulse on the Economy and Capital Markets: January 15 – 19, 2023

To Summarize: AI-driven stocks surge as other markets remain weak amid delayed Federal Reserve (Fed) rate cut expectations. Consumer activity remains strong coming off high December retail sales, improved sentiment and declining inflation. However, slowing growth in the Services sector continues to raise concerns. We unpack this and more in the January edition of The Pulse.

In the Markets: The markets kicked off the year mixed with large AI-driven tech companies attracting investor attention. Yet, other markets, such as bonds and crypto, continue to struggle amid delayed interest rate cut expectations from the Fed. Investors now increasingly believe that the Fed rate cuts will be later in the year than initially speculated.

Consumer Spending Breaks Records: Despite weak expectations for the economy, retail sales data in December and consumer sentiment were higher-than-expected. According to the CEOs of Wells Fargo and Bank of America, the key reason are healthy consumer balance sheets, declining inflation and strong employment situations.

Weakness in the Services Sector: Accounting for more than 75% of economic activity, the Services sector is raising concerns. For the last two years, the ISM Services index has been trending weaker and in December was barely above contracting. If the Services index drops below 50 for several months, it could signal a recession. 

Top Headlines: We’re reading about stealthily inflationary costs, apartment supply surges, generative AI dominating Davos, and a tough M&A environment for JetBlue and Spirit, Amazon, and Illumina.

Related resources:

• A stealth inflationary cost is hitting corporate profits and consumer wallets
• Apartment supply surges to highest levels since the mid-1980s
• Generative AI dominates Davos discussions as companies focus on accuracy
• Tough M&A environment for JetBlue and Spirit, Amazon’s iRobot deal, and Illumina to divest of Grail