Weekly Market Report: March 1, 2023
Markets last week were handed the informal end of 4Q earnings season, a busy calendar of economic reports, and a continuation of interest rate repricing we’ve seen over the past few weeks. A resilient economic backdrop (labor market, consumer spending) has withered away market expectations of 2H23 rate cuts, instead shifting toward a view of higher rates for longer. As expected, this has resulted in upward pressure in interest rates which will exact pressure on equity market valuations. Accordingly, the S&P 500 turned in a third consecutive weekly pullback with yields shifting higher across the curve. The risk off tone fostered a strong bid in the USD while commodity markets were relatively flat across energy, grains, and metals.
Market Anecdotes
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The resilient economic backdrop and persistent inflation since Powell’s press conference on February 1st has driven a pronounced shift higher in yields across 6-months, 2-year, and 10-year maturities, impacting bond markets, equity market multiples, and overall financial conditions.
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Markets are actively pricing in changing expectations toward the formal Fed forecasts for rate hikes on a go forward basis with the terminal rate of 5.37% now expected to be reached in August 2023. Based on constant 3m forward segments, the terminal rate is over 5.52%.
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One model anecdote supporting the improving Q1 growth backdrop is that the Atlanta Fed GDPNow model has grown from its initial January estimate of 0.7% to +2.7& most recently. Contrary signals include the yield curve inversion, housing market, and trends in the U.S. LEIs.
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A revision to the U of M consumer sentiment reflects further improvement in consumer sentiment toward the economy but B of A fund manager sentiment remains historically low and equity funds (retail investors) saw their biggest outflow in seven weeks last week.
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Federal Reserve data on U.S. household debt service show mortgage debt service, while increasing, remains near 20- year lows while consumer debt is at its highest levels since 2008 with delinquencies steadily on the rise since early 2022.
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With geopolitics seemingly in a constant state of anxiety, a SIPRI look at the world’s two largest arms dealers, with Russia representing 22% of global exports and the U.S. 35%, shows exactly who needs us (KSA, Aussie, South Korea, UAE) and them (India, China, Algeria) the most.
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Preqin noted the difficult market for public technology stocks translated to a ripple effect in venture capital fundraising with Q422 registering a nine year low in fundraising.
Economic Release Highlights
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The January PIO (Personal Income and Outlays) reported accelerating and above consensus YoY PCE headline and core inflation of 5.4% and 4.7% alongside MoM readings of 0.6% and 0.6%.
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The January PIO report showed strong Personal Consumption Expenditures of 1.8% and Personal Income growth of 0.6%.
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U.S. PMIs (C,M,S) for February of 50.2, 47.8, 50.5 improved over the prior month and came in slightly (manufacturing) and well (services) above the consensus forecast.
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Global PMIs (C, M, S) for February of 50.2, 47.8, 50.5 were higher than forecasted across the board and improved notably over January’s readings with Europe registering particularly strong.
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The first 4Q U.S. GDP estimate came in at 2.7% versus consensus of 2.9%, squarely within the street forecast range of 2.5%-3.0%.
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Existing Home Sales declined -0.7% in January to 4mm, coming in below consensus forecast but well within the low and high end of the range.
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