Friday, October 13, 2023
U.S. and International Equities
Major equity markets ended mixed with the S&P 500 Index higher this week as upside momentum in interest rates faded. Federal Reserve (Fed) comments suggested the recent rise of longer-term yields may obviate the need for further rate hikes. Moreover, last month’s FOMC minutes offered no major hawkish surprises, a welcomed outcome by investors.
European equities had their best one-day performance on Tuesday in over a year despite luxury goods maker Louis Vuitton falling to a 52-week low due to slowing growth. Given China’s economic challenges, the government announced potential stimulus to improve the economic landscape. Improving export data out of China this week provided some optimism over the impact of their stimulus measures.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors jumped from 30.1% to 40%, above the historical long-term average of 37.5%. Bearish investors reversed three straight weeks of increases. This week bearish investors declined to 36.5%; however, the latest reading remains above the 31% historical average. Neutral investors dropped to 23.5%, below its historical average.
Fixed Income Higher
The Bloomberg Aggregate Bond Index ended the week higher as investor concerns over the Fed’s higher-for-longer policy subsided. In addition, high yield bonds gained ground this week.
High-yield bond yields and spreads are rising at the sharpest rate since March alongside large outflows and a five-week 0.70% increase in 10-year yields. High-yield bond yields and spreads increased 0.33% and 0.29% over the past week and are now 0.76% and 0.57% above where they stood on September 14.
While spreads are still below historical averages, the speed with which the spread widening has taken place is a yellow flag that we’re watching closely. The riskier credit markets have been priced to perfection so we haven’t liked the risk/reward for those markets, and if the economy does slow, we could see spreads widen from current levels as well.
Commodities Mostly Higher
Commodities had a mostly positive week amid the recent geopolitical crisis in the Middle East. The International Energy Agency this week described market conditions as “fraught with uncertainty” but stated that the Israel-Hamas war had not yet directly impacted physical energy supplies. Gold and silver also caught a bid as investors look to safe havens given the geopolitical tensions.
Economic Weekly Roundup
Annual headline inflation was 3.7%, unchanged from August as firms are still able to pass along higher wholesale prices. Core inflation decelerated to 4.1% in September, slightly below the previous month’s rate of 4.3%. Shelter was the largest contributor to the monthly increase in consumer inflation, accounting for over half of the increase but this category should not be as impactful in the coming months as softer rent prices work their way into the official government metrics.
Costs of medical care services fell -2.6% from a year ago, indicating that some categories are getting less sticky. Used vehicle prices fell in September for the fourth consecutive month, pulling the annual decline down to -8%. Markets are still processing the implications of the latest report. Some shorter duration yields spiked up to the levels reached after the strong payroll report last week.
The Federal Reserve FOMC September minutes were released. The events from last weekend will likely change the Committee’s view on global risks, diminishing the likelihood of more interest rate hikes. Volatility of the data along with revisions made the decision process difficult. Hence, Committee members were cautious about the balance of risks. The word “pause” never made it into the minutes, which leads some to believe that the Fed is likely at the end of its rate-hiking campaign. Given interest rate policy is now restrictive, the risks are more balanced and appear to be successfully restraining the economy.
September Chinese Exports
Chinese exports fell 6.2% year over year in September, decreasing for the fifth straight month. The fall in exports comes as both foreign and domestic demand weaken with growing geopolitical tensions between other export-focused economies, such as Japan, South Korea, and Taiwan. Investors should know that decreasing exports and imports signal a wider slowdown in the Chinese economy.
September India Services PMI
India’s Services PMI rose to 61 in September, an increase of 0.9 from the previous month. The growth was primarily driven by an increase in consumer demand and an increase in overall investment in new businesses. Although domestic demand remained relatively strong, foreign demand, most notably from Europe, North America and some parts of Asia increased as well. The service sector accounts for over 50% of India’s economy and the sector continues to grow for the time being. India is one of the few bright spots in the global economy.
Weekly Employment Report
Initial claims for the latest week came in below economists’ consensus expectation and at the prior week’s print. However, continuing claims came in above both the expectations as well as the prior week.
The following economic data is slated for the week ahead:
- Tuesday: Retail sales (Sep), capacity utilization (Sep), industrial production (Sep), manufacturing production (Sep), business inventories (Aug), NAHB Housing Market Index (Oct)
- Wednesday: Building permits (Sep), housing starts (Sep)
- Thursday: Weekly initial and continuing unemployment claims, leading indicators (Sep), existing home sales (Sep)
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