Bonds and Equities Fall After PMI Beat

Yields rise in final session of 2022. Treasurys sold off today, both the 2 and 10-year yields rising ~6bps. Higher than expected PMI data was a key contributor, as the realized level of 44.9 points exceeded the forecast of 40.0 and was much higher than last month’s level of 37.2. Equities suffered on the day, the S&P 500 and NASDAQ losing ~.75%.

2022 Economic Highlights. 2022 has been a year of extreme financial and geopolitical events. Deglobalization, war, and COVID-19 continued to boost inflation and drive unprecedented market volatility across asset classes. The S&P 500 was down ~20% in 2022, and the 10-year rate was up 225bps to 3.88%. Pandemic impacts on labor markets and higher commodity prices after Russia invaded Ukraine were key contributors to this year’s inflation spike, which was already on an upward trajectory due to low rates, government stimulus, and persistent supply chain issues. Once it became clear that inflation was more than transient, central banks began to ramp up the pace of rate hikes in the middle of the year, with an economy-size weighted composite measure of global benchmark rates increasing from ~2.5% at the beginning of 2022 to almost 5% at year-end.

Year ahead. Looking ahead to 2023, markets are closely watching the China reopening, hot U.S. labor markets, and various geopolitical challenges. Next week will be highlighted by Friday’s nonfarm payrolls, with non-manufacturing PMI set to follow later in the day. FOMC minutes on Wednesday will also be closely watched.