Friday, November 3, 2023
U.S. and International Equities
Equities rallied this week amid a reprieve from the removal of refunding overhang, softer-than-expected macroeconomic data, dovish Federal Reserve comments, lack of spillover from Middle East tensions, and a less hawkish than expected change in policy from the Bank of Japan. The Russell 2000 had a very positive week after reaching a three-year low last week. Developed international equities also had a strong week as Europe has its best week since March.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors declined from over 29% to just over 24%, well below the historical long-term average of 37.5%. This week bearish investors jumped to over 50%, well above the historical average. Neutral investors declined to over 25% from 27.5 %, below its historical average. The overall report reflects strong bearish market sentiment amid a backdrop of a high 10-year yields, some sticky components of inflation, and geopolitical turmoil.
Fixed Income Higher
The Bloomberg Aggregate Bond Index rebounded following this week’s Federal Reserve comments along with a soft jobs report from last month. Traders believe the jobs report may suggest that the Federal Reserve is done raising interest rates. In addition, high yield bonds gained ground this week.
The Treasury department will need to borrow $776 billion in the 4th quarter, which is $75 billion less than expected. On Wednesday, Treasury will outline how it intends to borrow and how much new coupon supply will need to come to market. Treasury yields will likely need to stay around current levels to ensure sufficient demand for the amount of debt coming to market. We remain neutral on duration (interest rate sensitivity) largely based on the amount of Treasury supply expected over the next several quarters.
Commodities had a mixed week. Oil prices finished lower for the second consecutive week as the Middle East conflict has investors concerned with the size of Chinese fuel demand. Moreover, last week, the Energy Information Administration’s report showed US stockpiles rose last week by 1.372 million barrels, which came as a surprised to analysts. Copper prices increased for the second consecutive week amid a weaker dollar and concerns over the Chinese economic landscape.
Economic Weekly Roundup
As expected, the Federal Open Market Committee (FOMC) decided to keep the target range at 5.25 to 5.50%. Moreover, the statement was little changed. The committee added a comment that both financial and credit conditions will likely weigh on overall economic activity for households and businesses. In addition, the committee is actively monitoring the global economy to determine if additional firming may be appropriate.
The committee wants the markets to know the door is still open to further hikes if necessary. Yields on the 2-year Treasury fell on the official news out of the Fed.
October Consumer Confidence
Consumer confidence ticked up in October, but is still below pre-pandemic levels for the 35–54 year olds, which is an important cohort of the economy. In addition, more consumers are planning a vacation within the next six months, indicating a sustained demand for experiences despite showing some signs of spending fatigue.
Consumers have downshifted their plans to buy big ticket items such as autos, homes, and major appliances as they are a bit more nervous about the future. In addition, it appears the labor market improved so far in October as consumers felt an improvement in the availability of jobs.
October German Inflation
German inflation fell to 3.8% year over year in October, its lowest point in over two years, as energy prices continued to fall. Food prices, on the other hand, remained elevated and saw an increase of 6.1% over the same period. Prices associated with services also decreased slightly. Investors should know that slowing inflation in Germany could mean the Eurozone is turning a corner in the fight against rising prices.
September JOLTS Job Openings
September’s reports shows that the labor market is still finding its balance as the economy has more job openings than available workers. The quit rate is hovering at 2.3%, which is the same rate as 2019 suggesting that workers are less inclined to quit. The labor market is trending in the right direction, but still has a ways to go before policy makers are comfortable.
Weekly and Monthly Employment Report
Initial and continuing claims for the latest week came in above economists’ consensus expectation as well as the prior week for the second straight week. 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.
In October, the U.S. economy added 150,000 jobs, reflecting a labor market that has simmered over the past year, although this past month included the added temporary weight of the automobile strikes. The unemployment rate increased slightly to 3.9% after months of reaching all-time lows.
The following economic data is slated for the week ahead:
- Tuesday: Trade balance (Sep), consumer credit (Sep)
- Wednesday: Wholesale inventories (Sep),
- Thursday: Weekly initial and continuing unemployment claims, NFIB Small Business Index (Oct)
- Friday: Michigan sentiment (Nov), Treasury Budget (Oct)
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