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Economic & Market Insights

2023 Outlook: We share our trends to watch in the coming year. Explore >

For the week of December 5, 2022


Macro update

Several key details of the November employment report point to continued strong demand for labor, with limited labor supply keeping wages rising. Nonfarm employment increased by 263,000 in November, and average hourly earnings jumped 0.6% (5.1% year-over-year). The unemployment rate held at 3.7%. 

While some of the more cyclically-sensitive service industries—trade, transportation, warehousing and temp help—saw employment declines in November, the most cyclically-sensitive industries overall—construction and manufacturing—continued to increase headcount. After getting off to a slow start in the recovery, employment in healthcare and social assistance is picking up and added another 68,000 jobs last month. Other industries that had strong job gains last month were leisure and hospitality (up 88,000) and government (up 42,000). 

The 0.6% gain in wages last month was the strongest since January. Before rounding, the average workweek saw a decent-sized decline from 34.51 hours to 34.38 hours. After being elevated for the last 2 1/2 years, the workweek has returned to the pre-pandemic length. The coincidence of a shorter workweek and solid job gains could indicate that employers are showing reluctance around reducing staff, even if demand for workers is slowing.

Private residential spending continued its recent downward trend, declining 0.3% in October, and spending on new residential construction dropped about 2.0%. Private nonresidential spending declined 0.8% in October, undoing a portion of earlier strong growth. Public construction spending has been pushing higher in recent months, including a 0.6% gain reported for October.

The November ISM Manufacturing survey looked downbeat, sending a similar message to some other recent manufacturing surveys. The headline for the ISM survey declined from 50.2 in October to 49.0 in November reflecting softening in new orders, production, and employment relative to October. While manufacturing survey data have generally been weak lately, some measures of activity (such as data on industrial production and durable goods) have held up better.

Source: U.S. Bureau of Labor Statistics, Conference Board.
Macro Current Prior
Nonfarm payrolls 263% 284k
Unemployment rate 3.7% 3.7%
Consumer confidence 100.2 102.5


Markets update and key views into 2023

Despite the 14% rally in the S&P 500 and 11% rally in the Nasdaq from year-to-date lows in October, U.S. equities are on track for the largest annual drawdown since 2008. The entirety of the decline year-to-date has been driven by price-to-earnings multiple compression, as corporate earnings have been resilient rising 3%. Meanwhile the P/E multiple on the S&P 500 has moved down from roughly 24x at the beginning of the year to 17.5x at the end of November. 

We think it is unlikely corporate earnings will continue to rise in 2023 as financial conditions further tighten and monetary policy turns even more restrictive (with another estimated 100bp of fed funds hikes expected and about $1 trillion of quantitative tightening). We estimate the combination of slowing demand and margin compression could drive S&P 500 earnings 9% lower year-over-year in 2023. 

Along with the past six-week rally in equities, market volatility as measured by the CBOE Volatility Index (VIX) has retreated from 33-34 in mid-October to nearly 20—levels last seen in mid-August. Year-to-date, VIX has averaged about 26, up from an average of 19.5 in 2021, spending most of 2022 in the 20-35 range. One of the most important drivers of equity volatility is the level of monetary accommodation, with average VIX levels generally following the levels of interest rates after a lag. Given the blend of tight monetary policy, a weakening macro environment and still structurally weak market liquidity heading into 2023, we expect volatility will remain above its long-term average, with the VIX averaging around 25 for 2023 in our baseline forecast scenario.

2023 appears to be shaping up into a tale of two halves for equities, with deteriorating fundamentals and elevated volatility causing weakness in the first half and where the S&P 500 could retest 2022 lows. This selloff combined with disinflation, rising unemployment and declining corporate sentiment could be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery and pushing the S&P 500 to 4,200 by year-end 2023.

We expect credit market conditions to improve in 2023 amid an expected pause in the hiking cycle that should result in less rate and yield volatility. For 2022, high grade is on track to post a record negative return of roughly 15%, with bond spreads 45bp wider and yields up 263bp through the end of November. We expect high-grade bond spreads to modestly tighten in 2023 to 155bp and yields to rally toward 5.2%. For context, HG spreads traded in a range of 112bp to 190bp in 2022, and average spreads during recessions have been 325bp.

In leveraged credit, we see the more challenging fundamental backdrop translating into larger spread dispersion among sectors and ratings, wider high-yield bond and loan spreads and increased defaults in 2023. We expect high-yield bond spreads to widen by 75bp to 575bp (versus a non-recession average of 520bp and a recession average of 970bp) and loan spreads widening by 30bp to 600bp (non-recession average 470bp, recession average 805bp) by year-end 2023. We expect leveraged credit default rates to rise over the next two years, from roughly 1.6% in 2022 to around the long-term average of 3.2%.

Although dollar strength has been waning since late September, the USD has appreciated 7-8% year-to-date and 12-13% since mid-2021. Much of the dollar’s gains this year have been against other developed market currencies like the euro, sterling and yen, where exchange rates are at multidecade highs. For 2023, we think the dollar’s strength could modestly extend, but with gains mostly coming relative to emerging market currencies. 

Commodities are on pace to deliver a second consecutive year of double-digit returns in 2022. With slower global economic growth expected in 2023, but still-constrained supplies and low inventories, commodity prices could stay elevated. A few key views include Brent oil exiting 2023 at $96/bbl; agricultural commodity prices rising through 1Q23 and then moderating thereafter. Precious metals prices are forecast to rise 8%, and industrial metals may retest the lows of 2022 before a more sustained recovery in 4Q23. Natural gas prices in the U.S. are expected to decline 40%, while European natural gas prices could average 25-30% higher in 2023 as supply uncertainties linger.  

Source: Bloomberg. Closing prices on Dec. 2, 2022.
Markets 12/2/2022 △ W/W △M/M △Y/Y
S&P 500 4,072 1.1% 9.5% (10.3)%
Nasdaq 11,462 2.1% 10.8% (24.0)%
VIX 19.06 (7.0)% (24.7)% (37.9)%
WTI ($/bbl) $79.98 4.9% (9.3)% 20.7%
Brent ($/bbl) $85.57 2.3% (9.6)% 22.5%
Natural Gas ($/mmBtu) $6.28 (10.6)% 5.1% 52.0%
Gold ($/oz) $1,798 2.4% 10.3% 0.8%
U.S. IG Yield 5.23% (21)bp (89)bp 253bp
U.S. HY YTW 8.70% (18)bp (67)bp 358bp
USD Spot Index 1,257 (1.3)% (6.5)% 6.1%
Bitcoin B16,958 2.7% (16.2)% (68.4)%


Commentary from Federal Reserve Chair Jerome Powell last week essentially cemented expectations for a downshift to a 50bp hike at the December Federal Open Market Committee meeting, while also reiterating that “restoring price stability will require holding policy at a restrictive level for some time.” The market took Powell’s remarks as less hawkish than expected, and treasuries rallied. 

We continue to look for a 50bp hike at the December meeting, followed by two 25bp increases in February and March before a pause. Assuming we are correct, cumulative hiking this cycle would reach 475bp and would put the upper bound of the fed funds target range at 5%.

Key views on Treasury rates for 2023 include 10-year yields declining to 3.4% by year-end and for the curve to dis-invert, with shorter-dated treasury yields to fall more than longer-dated treasury yields.

Although rates on a 30-year fixed-rate mortgage have dropped over 80bp in the past month, rates are doubled since the beginning of the year and are around 20-year highs.

Source: Bloomberg. Closing prices on Dec. 2, 2022.
Rates Monitor 12/2/2022 △ W/W △M/M △Y/Y
Fed Funds  3.75-4.0% 0bp 75bp 375bp
1M CME SOFR 4.19% 11bp 39bp 414bp
1M LIBOR 4.18% 13bp 34bp 408bp
3M U.S. Tbill 4.25% (1)bp 12bp 420bp
2yr U.S. Treasury 4.27% (18)bp (44)bp 368bp
10yr U.S. Treasury 3.49% (19)bp (66)bp 214bp
30yr fixed rate mortgage 6.54% (24)bp (81)bp 336bp


Issuance / M&A volumes

We expect improved credit market conditions in 2023 amid a clearer backdrop for growth and inflation, slower pace of Fed tightening, and less rate and yield volatility. 

We forecast 2023 HY bond gross new issuance of $200 billion, which would represent a 90% year-over-year increase. Versus the past decade’s standards, this would still be a light year at roughly 40% below average. For institutional loans, we forecast 2023 new issue volumes of $300 billion, a roughly 30% year-over-year increase. These anticipated loan volumes would be 46% below the past decade’s average.

In high grade, we expect issuance to be down slightly in 2023 to roughly $1.2 trillion. This would still be modestly elevated versus the five-year average before the pandemic, and the fourth-largest annual issuance year excluding 2020.

Source: Bloomberg.
Note: All issuance and M&A figures for North America. November 2022. To be updated monthly.
Volumes ($ billions) 2022 YTD 2021 YTD % Change FY2021
IPO $7 $147 -95% $152 
SPACs $13 $146 -93% $162 
Venture Capital $210 $311 -32% $330 
Investment Grade $1,204 $1,320 -9% $1,380 
High Yield $104 $473 -78% $484 
Leveraged Loans $236 $807 -71% $835 
M&A $1,761 $3,260 -46% $2,678 


Chart of the week

Stocks on track for biggest annual declines since 2008 

Source: Bloomberg.


J.P. Morgan content & research highlights

· Making Sense Podcast: Raise Capital When You Can: Guidance for Mid-Caps


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Ginger Chambless is Head of Research for Commercial Banking. In this role, she produces curated thought leadership content for CB clients and internal teams. Her content focuses on economic and market insights, industry trends and the capital markets. Connect on LinkedIn.

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