Friday, September 22, 2023
U.S. and International Equities
Markets Solidly Lower
The major markets lost ground this week as investors anticipate more rate increases given this week’s FOMC meeting. The Federal Reserve indicated that interest rates will remain higher and it will take longer to bring inflation in line.
Bank of America noted that global equity funds witnessed outflows of $16.9 billion for the week ending September 20, including $17.9 billion from U.S. equity funds. Both fund outflows represent the highest levels since December 2022.
Dampened mega cap tech momentum is a key theme in the recent market pullback as this subsector has driven the bulk of the broader market gains for this year. Barclays noted that the leadership gap between the S&P 500’s top 10 performers and the rest of the index has fallen from the 99th percentile in June to around 80th percentile currently.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors declined for the second straight week from 34.4% to 31.3% this week, tracking below the historical long-term average of 37.5%. Bearish investors increased from 29.2% to 34.6%, above the 31% historical average.
Fixed Income Lower
The Bloomberg Aggregate Bond Index ended the week solidly lower on the back of this week’s FOMC meeting. In addition, high yield bonds lost ground this week, however less than the Aggregate Bond Index, as rising default risks appear to not yet be fully priced in.
Yield-based buyers seem like they’re becoming more comfortable that the Federal Reserve could be on hold or close enough to terminal, so much so that some are adding to duration (interest rate sensitivity). With spreads and yields at current levels, AAA-rated Agency MBS may offer a compelling way to do that, in our view. Spreads and yields are above long-term averages and MBS could outperform BBB-rated corporate credits if/when the economy slows.
Commodities Mostly Lower
Gold inched higher as silver had a positive week. Energy prices declined this week amid tightening supply expectations following Saudi Arabia and Russia’s decision to extend their production cuts until December. In addition, Russia issued an export ban on diesel and gas. Russia stated the export ban, which has no end date yet, is intended to replenish its own supply and reduce prices domestically. Supply constraints on top of increasing demand are causing many analyst to forecast a price of $100 per barrel of West Texas Intermediate crude oil.
Economic Weekly Roundup
During the September Federal Open Market Committee meeting, the Federal Reserve kept the target rate unchanged as committee members confessed that the job market has slowed since the last meeting. The main tweak in the latest statement covers the labor market. No longer robust, Fed officials highlighted that job gains have slowed in recent months, although still fairly solid. The three-month moving average has steadily declined for most of this year.
We believe that markets are pricing in a bit more than a 30% chance of a hike in November but if inflation continues to abate and consumers appear to pull back spending, the Fed will likely remain patient and hold rates unchanged in November. Fed officials revised downward their core inflation projections for this year as inflationary pressures eased and the labor market cooled in recent months. Markets will likely respond favorably to the revision to inflation expectations.
Single-Family Home Landscape
Traffic of prospective buyers, a leading indicator of single-family home sales, declined in September to the lowest level since February, suggesting the existing home market likely has additional downside. Single-family housing imbalances will likely last for a while as the country experiences an inventory shortage, especially for existing homes. Housing affordability could be a secular issue for quite a while until the supply of homes comes into balance with demand.
European August Inflation
The August annual inflation rate in the European Union was 5.2%, down 0.1% from July. Inflation eased in 15 member states, remained stable in one, and increased in 11. Of those 15 member states that saw a decline, Denmark, Spain, and Belgium saw the sharpest drops, falling 2.3%, 2.4%, and 2.4%, respectively. Of the 11 states that saw an increase, Hungary, Czechia, and Slovakia saw the greatest increase, coming in at 14.2%, 10.1%, and 9.6%, respectively.
Japan’s exports fell for a second month in a row, dropping 0.8% year over year in August. Exports to its largest trading partner, China, fell 11% on account of weakening Chinese demand for building materials. Exports to China relating to seafood also suffered as China continues to maintain its ban on Japanese products following on from the Japanese plan to release treated radioactive water into the ocean near Fukushima. While exports to China fell, exports to the United States grew by 5.1% over the same period, driven by automobiles and equipment products.
Weekly Employment Report
Both continuing and initial claims for the latest week came in below economists’ consensus expectation as well as the prior week’s print. We believe 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. Signs of this can be seen amid last month’s employment report as the unemployment rate ticked up to 3.8%.
The following economic data is slated for the week ahead:
- Tuesday: Building permits (Aug), FHFA Home Price Index (Jul), S&P/Case-Shiller comp Home Price Index (Jul), consumer confidence (Sep), new home sales (Aug)
- Wednesday: Durable orders (Aug)
- Thursday: Weekly initial and continuing unemployment claims, GDP (Q2), pending home sales (Aug)
- Friday: Personal consumption expenditure (Aug), personal income (Aug), wholesale inventories (Aug), Michigan sentiment (Sep)
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