Friday, August 11, 2023
U.S. and International Equities
Markets Mostly Lower
The major market indexes ended mostly lower for the second straight week on the back of higher oil prices and rising interest rates amid somewhat mixed support for the disinflation narrative. As we head toward the end of earning season, the earnings beat rate is above analyst expectations, however revenue growth has been marginal. Next week, retail earnings will be in focus as investors will be keying in on consumer spending trends across goods and services, sector inventories, and the general inflation outlook.
According to the AAII Sentiment Survey, investor optimism is above average for the 10th consecutive week, however bullish sentiment decreased as both neutral and bearish sentiment increased. Moreover, the AAII reports that the present bullish sentiment represents the longest streak above-average since a 13-week stretch from February to May 2021.
Fixed Income Returns Mixed
The Bloomberg Aggregate Bond Index ended lower for the fourth straight week. July’s improving inflation print does not appear to have traders believing the Federal Reserve (Fed) is near the end of its campaign of raising interest rates. This, in light of the fact that some members of the Fed mentioned this week that the bank is not done fighting inflation.
Per Morningstar, open-ended intermediate core and core plus bond funds (mutual funds and ETFs) have had strong inflows of over $100 billion during the first half of 2023. These inflows come at an opportune time, allowing money managers to support the bond market as the Fed continues to run quantitative tightening (QT) and banks see declining deposits, both of which have taken a step back from supporting core bond markets.
Energy prices ended higher as the major metals (gold, silver, and copper) sold off this week. With U.S. stockpiles of crude oil and fuel products still lower than expected, reflecting stronger than anticipated demand, prices for West Texas Intermediate (WTI) have climbed above $80 a barrel.
In addition, as forecasts for a stronger economic recovery prove to be correct, oil demand should see a pickup in the U.S. and globally. How this affects the inflationary and economic landscape could play a major role for second half market performance.
Economic Weekly Roundup
Inflation increased marginally last month, snapping a 12-month streak of slowing consumer price increase. In addition, the report could signal that the rest of the battle to curb a historic spike in consumer costs could be more challenging. Consumer prices, in general, increased 3.2% from a year earlier, which is up from 3% in June year-over-year.
July Small Business Report
The National Federation of Independent Business (NFIB) released its Small Business Optimism Index, which increased to 91.9 in July from 91.0 in June; however, the reading was the 19th consecutive month below the 49-year average of 98. The lack of qualified applicants along with inflation were cited as concerns.
In addition, the National Federation of Independent Business (NFIB) report revealed small businesses plan to increase capital expenditures (capex). The capex index jumped from 25 to 27 in July, up from a recent low of 19 in April (see chart below) and above the post-pandemic average of 24.9.
Japanese Household Spending
Japanese household spending declined 4.2% year over year in the month of June as consumers contend with both elevated prices and declining real wages. June was the fourth straight month household spending fell. Despite an almost 4% pay hike this year, employees of Japanese companies still experienced a 1.6% year-over-year decline in real wages in June. June was the fifteenth straight month for real wage declines.
Weekly Employment Report
Initial claims for the latest week came in above economists’ consensus expectation and exceeded the prior week’s print. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were below consensus along with the prior week. 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, in addition to another 170 S&P 500 companies reporting second quarter earnings:
- Tuesday: Export / import index (Jul), retail sales (Jul), business inventories (Jun), NAHB Housing Market Index (Aug)
- Wednesday: Business permits (Jul), housing starts (Jul), capacity utilization (Jul), industrial production (Jul), manufacturing production (Jul), FOMC Minutes
- Thursday: Weekly initial and continuing unemployment claims, leading indicators (Jul)
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