Friday, March 24, 2023
U.S. and International Equities
Stocks ended the week higher amid a volatile week of trading. Bank balance sheets continue to be a concern for investors, in addition to hawkish global central banks’ response to persistent inflation pressures. The most recent bank challenges has market participants concerned over more banking woes as some investors believe the economy may be on the brink of recession.
As the Federal Reserve has increased interest rates, longer-term bonds purchased by banks have since declined in value, creating a headwind for the banking sector. Given the market decline of bonds last year, some poorly hedged banks find themselves in a predicament where they may need to raise additional capital per banking regulations. Raising capital may include stock sales, putting downward pressure on share prices as banks are hamstrung from the inverted yield curve.
International equities outperformed U.S. stocks even as concerns about the European banking sector remain in the forefront of investor’s minds. Economic data has been showing better-than-expected conditions as valuations, in general, are relatively more attractive vs. U. S. equities.
Fixed Income Mostly Higher
The Bloomberg Aggregate Bond Index finished the second straight week higher as yields declined, reversing a pattern of lower bond prices and higher yields. Given the concerns over the banking landscape, bond investors believe the Fed will eventually reverse course on monetary policy and the “higher-for-longer” theme.
In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, gained ground this week. This particular fixed income investment class has been affected the most given the recent banking climate challenges. Two weeks ago, high yield fixed income was leading most bond sector areas year-to-date despite economic growth concerns. For the second straight week, they are now lagging core bonds.
Investment grade corporate new issuance may decelerate for a third consecutive year in 2023, even after an aggressive pace in the primary market over the past several weeks. Increased volatility and funding costs that remain higher across the curve have started to temper volume, with the year-to-date calendar about 5% behind the 2022 pace as of mid-March. Decreased new issuance could be a tailwind for corporate bond prices. We prefer shorter maturity high quality corporates at this point.
Energy prices finished mixed even as traders remain concerned over the present banking climate and its potential effect on the economy. Crude oil rallied after reaching a 15-month low two weeks ago. Natural gas prices declined for the second straight week as winter makes an exit in the United States. The major metals, gold, silver, and copper, ended the week mixed as some investors sought refuge in precious metals given the prior week’s banking news. In addition, Chinese central bank buying of gold has also helped the recent return dynamics of this precious metal.
Economic Weekly Roundup
During this week’s FOMC meeting, the Fed chose to hike interest rates by 25 basis points (0.25%), as inflation remains unacceptably high in the eyes of the Fed and unemployment remains very low. This brings the upper bound of the federal funds rate to 5%. The Fed included in the March statement that the U.S. banking system is “sound and resilient” and discussed during the news conference the importance of the actions taken to insure deposits.
February Home Sales
Home sales reversed a year-long decline last month as existing home sales posted its largest monthly increase since July 2020. According to the National Association of Realtors, month-over-month sales increased almost 15%. That being said, compared to a year ago, sales dropped over 20%. A brief decline in mortgage rates is being credited for the increase in home sales, however some economists believe that this jump could be temporary. The median price for an existing home declined 0.2% compared to February 2022 to $363,000, which represents the first price decline in over a decade.
March Business Activity
U.S. business activity increased in March as orders rebounded for the first time in six months, according to the S&P Global PMI Composite. In addition, the print also suggested that inflation could continue to slow gradually.
S&P Global stated that its flash U.S. Composite PMI Output Index increased to 53.3 this month. This represents the highest reading since May 2022 and followed a reading of 50.1 in February. In addition, the March reading was the second straight month that the PMI remained above 50 which indicates private sector growth.
Weekly Unemployment Report
Initial claims for the latest week came in below economists’ expectations as well as the prior weeks’ report while continuing claims came in above both prints. Labor markets continue to show limited signs of softening.
The following economic data are slated for the week ahead:
- Tuesday: Federal Housing Finance Agency January Home Price Index (Jan), wholesale inventories (Feb), consumer confidence (Feb)
- Wednesday: Pending home sales (Feb)
- Thursday: Weekly initial and continuing unemployment claims, GDP (Q4)
- Friday: Personal consumption expenditure (Feb), personal income (Feb), PCE deflator (Feb), Michigan sentiment (Mar), S&P/Case-Shiller Home Price Index (Jan)
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