Friday, June 23, 2023
U.S. and International Equities
All major market indexes ended lower given this week’s Federal Reserve Chairman Powell’s Congressional testimony. Even as inflationary conditions in the U.S. are showing steady improvement following the Federal Reserve’s hawkish policy stance, core inflation is still high and should remain a priority for the Federal Reserve to solve. The S&P 500 and Nasdaq Composite Indexes are on track to snap five and eight-week winning streaks, respectively.
After returning 39.6% in the first half, sparking memories of the tech bubble more than 20 years ago, the technology sector is trading at a forward price-to-earnings ratio (P/E) of 27. That valuation represents a 44% premium to the S&P 500’s forward (next 12 months) P/E, well above the 20-year average of a 15% premium and the highest since April 2004. Some of the rich valuations can be attributed to artificial intelligence (AI) enthusiasm and its potential to boost efficiency for corporate America. This enthusiasm may be a bit ahead of itself even though the long-term opportunity, while difficult to value, is compelling.
Fixed Income Lower
The Bloomberg Aggregate Bond Index finished lower this week given Powell’s congressional testimony. High-yield credit also had a negative week on the back of this week’s market selloff, yet continues to be a leader in the fixed income asset class year-to-date.
June Treasury auction demand has been mixed on coupon securities but still solid with Treasury Bills (T-Bills). So far this month, the Treasury Department has issued over $600 billion in new debt, most of which has been shorter maturity T-Bills, and there has been very little impact on prices or liquidity. Despite the still elevated auction schedule, we do not think Treasury issuance will be disruptive to fixed income markets.
According to recently released data, non-U.S. investors remain the largest class of owners of U.S. corporate bonds, followed by life insurance companies and mutual funds. In Q1 2023, the market value of bonds owned by insurance companies and non-U.S. investors rose by more than the overall market, indicating continued demand from these mostly buy and hold investors. While we remain underweight investment-grade bonds, we think the short-to-intermediate corporate categories are attractive.
Commodities Mostly Lower
Energy prices ended mixed this week. Traders are concerned about oil prices, triggered by the interest rate rises in the EU leading to prospects for lower growth. In addition, disappointing stimulus numbers out of China are worrisome given the nation’s demand for energy. The major metals (gold, silver, and copper) finished the week lower. Gold prices posted their worst week in four and a half months amid Powell’s testimony this week amid the threat of interest rate increases.
Economic Weekly Roundup
U.S. Homebuilder Landscape
The domestic housing market for both single and multi-family units had a very strong May as the U.S. Homebuilder Confidence Index released this week improved to an almost one-year high. The monthly report released by the National Association of Home Builders (NAHB) increased to 55, surpassing forecasts of 51. This marks the sixth consecutive month of improvement and the first time above 50 since July 2022.
Moreover, the level of multi-family units under construction has grown to a point that it has now surpassed that of single-family units. This is the first time this has happened since the condominium and apartment construction boom of the early 1970s. We believe the increased supply of multi-family homes coming online is being supported by millennial demand.
U.K. inflation unexpectedly stayed stuck at 8.7% in May, causing the Bank of England (BOE) to increase interest rates by 50 basis points (0.5%), taking them to a level not seen in more than two decades. The cost of airfares, entertainment, and used cars increased, keeping inflation elevated. U.K. core inflation, which takes out volatile food and energy costs, reached a 31-year high of 7.1%. The inflation report is also likely to compound concerns that Britain’s cost-of-living challenges may intensify in the coming months as mortgage holders face higher interest rates pushed through to stymie stubbornly strong inflation.
Bank of England Maintains Hawkish Stance
The Bank of England (BOE) announced a 0.5% interest rate hike in an attempt to more forcefully lower inflation. Following the decision, BOE Governor Andrew Bailey commented that although such a drastic hike has the potential to cause difficulties for some members of the public, this is ultimately the correct step forward due to inflation remaining stubborn and the likelihood of it causing greater negative consequences in the future.
Initial claims for the latest week came in above economists’ consensus expectation and at the same level as the prior week. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, came in below the prior week’s levels and below economists’ expectation. The labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
- Tuesday: Building permits (May), durable orders (May), FHFA Home Price Index (Apr), S&P/Case-Shiller Home Price Index (Apr), consumer confidence (Jun), new home sales (May)
- Wednesday: Wholesale inventories (May)
- Thursday: Weekly initial and continuing unemployment claims, GDP (Q1), pending home sales (May)
- Friday: BEA Total Light Vehicle Sales (May), Personal Consumption Expenditures (May), Personal Consumption Expenditure deflator (May), Michigan sentiment (Jun)
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