Friday, March 3, 2023
U.S. and International Equities
Stocks ended the week higher, reversing three-straight consecutive weekly declines. Amid concerns over global price pressures and hawkish central bank monetary policy, investors added risk to portfolios. For the week ending March 1, the American Association of Individual Investors showed bearish sentiment increased to 44.8% from 38.6% in the prior week, marking the highest bearish percent reading since late 2022 and above the 31% historical average for the 61st time in the past 66 weeks.
Small cap valuations, per the S&P 600 Index, still look quite attractive on a forward price-to-earnings ratio (P/E) basis. The index is currently trading at a 22% discount to the S&P 500 Index, which represents the largest margin discount since the tail end of the tech bubble in 2001. The 20-year average is an 8% premium.
Fixed Income Mostly Lower as Yields Increase
The Bloomberg Aggregate Bond Index finished the week in the red as yields increased for the fourth straight week. Bonds have been directly influenced by concerns over the general inflationary landscape as some traders believe the Federal Reserve will maintain its higher-for-longer policy. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, continue to outperform core bonds for the week as well as year-to-date despite economic growth concerns.
Treasury yields rose last week and the curve flattened as January Personal Consumption Expenditure (PCE) deflator data came in notably hotter-than-expected. The 2-year Treasury yield followed Fed terminal rate pricing higher, rising 0.20% to 4.81%. The 10-year yield jumped 0.13% to 3.94%, its highest level since early November 2022.
Energy prices finished higher this week even as traders grew concerned that the Fed will not pivot on monetary policy given the recent inflation data. The major precious metals, gold and silver, also ended the week higher after facing concerns over future economic growth.
Economic Weekly Roundup
U.S. Manufacturing Report Mixed
U.S. manufacturing contracted for a fourth straight month last month. However, there are signs that manufacturing should begin to stabilize as new orders declined from more than a two and a half year low.
The ISM’s manufacturing PMI increased to 47.7 in February from 47.4 in January. This marginal increase was the first in six months. However, this print came in just below FactSet economist estimates. A PMI reading below 50 indicates contraction in manufacturing, which accounts for over 11% of the U.S. economy.
U.K. Retail Inflation
The British Retail Consortium (BRC) stated this week that inflation in major British store chains reached a fresh 12-month high, reflecting the rising cost burden for both retailers and consumers. Prices rose by the largest annual amount across all major categories monitored by the BRC since records started in 2005.
February China Manufacturing Activity
According to official data from China’s National Bureau of Statistics, February factory activity has begun to broaden, while PMI data for both manufacturing and services indicates that the nation’s rebound that began in January continues to gain momentum. While welcomed by markets, the positive data release caused inflation-sensitive Treasury yields to increase given that a resurgence in China’s economy will foster inflation by igniting higher commodity prices.
Initial and continuing claims for the latest week came in below economists’ expectations as well as the prior weeks’ report. That being said, labor markets continue to show limited signs of softening amid increasing layoffs.
The following economic data and potentially market-moving events are slated for the week ahead:
- Monday: Durable orders (Jan), factory orders (Jan)
- Tuesday: Wholesale inventories (Jan), consumer credit (Jan)
- Wednesday: ADP Employment Survey (Feb), trade balance (Jan), JOLTS Job Openings (Jan)
- Thursday: Weekly initial and continuing unemployment claims
- Friday: Hourly earnings (Feb), average workweek (Feb), manufacturing payrolls (Feb), nonfarm payrolls (Feb), private nonfarm payrolls (Feb), unemployment rate (Feb), Treasury budget (Feb)
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