Weekly Market Report: May 12th, 2023
Markets last week continued to wrestle with banking sector weakness, the debt ceiling stalemate, and a mixed bag of economic data points. The S&P 500 closed the week down 0.29%, outperforming developed (-1%) and emerging (-2.13%) markets, leaving global equity markets up 8% YTD. Bond yields edged slightly higher with the 10yr UST closing at 3.46% while the USD clawed back a good percentage of its YTD losses, up 1.45% for the week. WTI drifted back down to the $70 support level again, joining industrial metals in taking the overall commodity complex lower on the week.
Market Anecdotes
- Bank balance sheet stress, declining deposits, FDIC seizures, curtailed lending activity, and commercial real estate exposure amount to significant uncertainty surrounding policy, consumer/business confidence, and the overall economic outlook.
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Key banking system monitoring points are deposit outflows and loan/lease growth alongside credit spreads and bond market receptiveness to new issuance.
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The latest IMF Global Financial Stability Report highlighted the stark difference between U.S. and European bank stresses in terms of bond market-oriented balance sheet losses with exposure nearly 2x higher in the U.S. and losses as percentage of Tier 1 capital nearly 5x higher.
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BCA U.S. Political Strategists are assigning a 10% probability of a technical default on U.S. debt thanks to historically high political polarization which may introduce greater risks if the economy proves resilient. Regardless of default, the investment implication is clearly negative.
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MRB is maintaining a contrarian stance on recession highlighting a stabilizing housing market, the poor track record of a contractionary ISM Manufacturing Index, the manufacturing weighted and narrow variable LEI, and resilient unemployment despite the uptick in claims.
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While non-U.S. equities are up 18% in USD terms since the mid-October bottom, momentum has slowed materially over the past two months, defensive sectors have been outpacing the cyclicals, and higher beta geographies have underperformed the U.S.
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Economic data out of China including a sharp decline in aggregate financing and new loan issuance alongside weak PMI and trade data have supported the view of what looks like a lopsided and tempered recovery.
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The BoE met expectations by delivering a 12th consecutive rate increase, hiking rates by 0.25% to 4.5%.
Economic Release Highlights
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April’s headline and core CPI readings slowed as expected with headline and core readings of 4.9% and 5.5% respectively. MOM registered 0.4% for both headline and core, as forecasted.
- April’s headline and core PPI also slowed relative to prior month levels and came in below consensus on both headline (2.3% vs 2.5%) and core (3.2% vs 3.3%) readings.
- Initial jobless claims of 264k were well above the 245k consensus and the estimated range of 240k-250k, taking the four-week moving average to 245.5k. Claims are now 82k above the 1yr low in September of 2022.
- May’s U of M Consumer Sentiment survey fell sharply to 57.7, well short of consensus forecast for 63.0 and the prior month reading of 63.5.
- April’s NFIB Small Business Optimism Index deteriorated slightly to 89.0, just below the 89.7 spot consensus and at the low end of the forecast range (89.0-90.0).
