Weekly Market Report: August 18th, 2023
Market focus points last week included a continuation of the grind higher in interest rates, more concern surrounding the deteriorating economic picture in China, and a relatively light economic calendar. In lockstep with consensus outlooks leaning more into the soft landing narrative and seemingly less things for markets to worry about, we’ve seen equity markets begin to consolidate (soften). The S&P 500 lost 2% last week while international developed and emerging equity markets were down closer to 3%. 10yr UST yields closed higher for a fifth consecutive week, reaching their highest level since 2007. Commodity markets closed down 1.5% thanks to 2%-8% declines across various energy markets while the USD strengthened approximately 0.5% across most major currencies.
Market Anecdotes
- The move higher in yields is again posing a risk to risk assets as rates have climbed to levels not seen since 2007. Resilient economic growth, inflation, and heavy UST supply are all contributing to the move higher in yields.
-
Given robust personal consumption has meaningfully underpinned economic growth, measures of excess savings, real wage growth, sentiment measures, and labor market dynamics are key metrics. That said, differing measures of excess savings are producing a variety of perspectives.
-
FOMC meeting minutes released last week suggested that September may see another policy decision to ‘skip’ but rate hikes in later months this year are in play. Markets are pricing in no move in September but two rate cuts by July of next year.
-
From a monetary policy perspective, hawkish inflation risks include strong commodity markets (energy), robust wages, and above trend growth. The Dovish/soft landing case consists of continued disinflation trends and resilient consumption.
-
The Atlanta Fed GDPNow model increased its 3Q forecast on the back of strong personal consumption (retail sales) to 5.8%. Talk of recession on corporate earnings calls fell dramatically but Bloomberg economist survey results continue to see troubled waters ahead.
-
The U.S. housing market is getting pulled in two different directions with the highest mortgage rates in 23 years freezing buyers and sellers and pushing home ownership beyond the reach of many Americans while market technicals remain supportive of new home construction.
-
Last week the PBOC cut its MTLF by 15bps to 2.5% and the reverse repo rate by 10bps to 1.8% but categorized both moves as liquidity driven, not a change in their monetary policy stance.
Economic Release Highlights
-
Retail Sales in July rose 0.7%, more than consensus 0.4% and the forecast range of 0.2%-0.5%. Ex-Vehicles (1% vs 0.4%) and Ex-Vehicles & Gas (1% vs 0.4%) also handily beat consensus.
- August Housing Market Index registered 50, well below consensus forecast of 56 and the forecast range of 55-58.
- July Housing Starts (1.452M vs 1.455M) and Permits (1.442M vs 1.464M) both came in slightly under their respective consensus forecasts.
- Industrial Production in July grew 1%, more than the spot consensus of 0.3% and the forecast range of -0.2% to 0.7%. Manufacturing Output (0.5% vs 0% and Capacity Utilization 79.3% vs 79.1%) also exceeded estimates.
