Weekly Market Report: September 8th, 2023
The holiday-shortened week gave us a light economic calendar and a mix of headwinds for risk assets including a backup in rates, a continued rise in energy prices, labor/geopolitical disputes, and some economic surprises translating to ‘good news is bad news’ momentum for stock prices. The S&P 500 fell 1.29% but small caps fared much worse, down 3.5%-4.5%. International developed markets were down 1.6% on sluggish economic data out of Germany while emerging markets (-1.8%) were again weighed down by China. Rates drifted higher with the biggest move in the belly of the curve, pushing the 10yr yield back above 4.25%. The USD (+0.82%) continued to rally off its mid-July low while commodities (+1.34%) rallied again thanks to another move higher in oil prices, now north of $87/barrel.
Market Anecdotes
- Markets anticipating this week’s FOMC meeting and fresh inflation data have settled into a “good news is bad news” narrative highlighting risk asset opposition to a higher rates for longer path of monetary policy over the coming 12-18 months.
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Adding to the complicated landscape for monetary policy is WTI oil prices surging to their highest levels since November and Brent surpassing $90 for the first time this year. Drivers include OPEC 2.0 extending production cuts and resilient demand from the U.S., EU, and China.
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BofA FMS highlights how unlevered asset managers are holding near record net long positions in 10yr Treasury futures (a bet on falling bond yields) while leveraged fund COT data shows a near record net short position in 10yr Treasury futures (a bet on rising bond yields).
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USD strength has been notable with the Euro falling versus the USD for an eighth consecutive week, USD/CNY hitting its highest level since December 2007, and the overall trade weighted USD bouncing higher after a fall from record highs.
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A research note from Bianco Research reminds us of the high correlation between bank lending standards and bankruptcy filings, while credit spreads continue to see blue skies ahead, injecting a bit of caution into the summer risk asset rally.
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Tightening lending standards leading to a credit cycle across commercial credit and real estate is becoming clear with regional, international, and local banks alongside the CMBS market holding the lion’s share of real estate loans and buy side investors of all colors holding commercial loans.
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Apollo made note last week of the estimated $7.6trn in US government debt maturing over the next year which logically should translate to persistent upward pressure on interest rates.
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The impact of high mortgage rates on mortgage applications and existing home sales is clear while renting as an alternative is being accommodated by record high multi-family construction.
Economic Release Highlights
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The ISM Services Index exceeded forecasts and the high end of the range, coming in at 54.5 versus a 52.4 consensus in August. The final PMI Services Index was revised down to 50.5.
- Initial Unemployment Claims of 216k took the 4-week average down from 237.5k to 229.25k.
- China’s August Caixin services PMI fell to 51.8 from 54.1 and German industrial orders fell 11% in July.
- Durable Goods New Orders declined 5.23% in July after a strong 4.29% reading in June.
- July Factory Orders declined by 2.1%, slightly less than the -2.6% expected.
