Weekly Market Report: September 2, 2022
Last week marked the unofficial end of summer, the beginning of a new school year, the end to a difficult August, and a lumpy opening for September. Markets digested the August jobs report and were forced to acknowledge the Fed’s resolve on inflation despite indications of a meaningful slowdown in the economic environment and what looks like the beginning of a slowdown in inflation data. Equity markets closed the week down over 3% with broad weakness across sectors. The yield curve was volatile at both ends of the curve leaving the 2yr/10yr still solidly in inverted territory (2y/10y) and rates higher across the curve. The 10yr closed the week up 16bps to 3.20%. Commodities fell sharply on slowing global growth concerns and we saw a +0.67% flight to quality rally in the USD.
- After being way too dovish for way too long, the Fed seems intent on a path of the opposite extreme for the
time being and markets are pricing in a corresponding economic contraction.
- The disconnect between market expectations and FOMC projections is being reconciled over the past couple of weeks. Strategas look at several macro indicators shows how conditions have clearly tightened over the past 45 days.
- Market technicals look mixed with the S&P 500 holding the 3,900-support level last week but Europe has already pushed itself back to June levels – suggesting U.S. markets may also revisit.
- Slowing global growth and the policy response to inflation have investors on edge. Percolating evidence of supply side and pandemic related disinflation may offer some glimmers of hope.
- The pain of rising interest rates is clear and translates to rising mortgage rates (30yr (5.66%), 15yr (4.98%), and 5/1 adjustable (4.51%)) exerting pressure on the housing market. Rates are also pressuring P/E multiples which sit near the midpoint of the range over the last ten years.
- Bloomberg noted some concern surrounding declining (but still record high) commercial bank deposits with the first QT ramp up set to begin in September – possibly a demand side technical concern but Bianco Research illustrated the case that there will be no selling of bonds/notes through 2024 at these levels.
- Last week in geopolitics saw the U.S. send two guided missile cruisers through the Taiwan Strait, a U.S. order to Nvidia and AMD to halt certain AI chip exports to Russia, China, and Hong Kong, hiccups in the Iran nuclear investigation, and Russia halting natural gas supply to Europe.
- The EU energy crisis with December and February sanctions looming has EU bound Russian gas being flared, the EU buying gas at any price, and a G7 agreement of a price cap on Russian oil.
Economic Release Highlights
- The August jobs report revealed 315,000 new jobs, just beyond the consensus forecast of 293,000 but the unemployment rate ticked 0.02% higher to 3.7%. The labor market participation also increased 0.02% to 62.4%.
- ISM Manufacturing Index for August stayed at 52.8, just above the spot consensus forecast of 52.0.
- The Case-Shiller Home Price Index rose 0.4%, less than the 1.1% consensus forecast.
- Consumer Confidence in August climbed to 103.2, ahead of the consensus estimate of 97.4 and above the high end of the range.
- The July JOLT survey showed 11.239mm job openings, well more than the consensus 10.4mm and above the high end of the range.