Weekly Market Report: September 13th, 2024

Markets rebounded nicely from the prior week with a muzzled FOMC, a relatively light economic calendar, an uptick in the soft-landing narrative, and an increased possibility of a 50 bps move by the Fed leading U.S. equity markets to five consecutive up days and the S&P 500 (+4%) back within 1% of its record high. The NASDAQ 100 (+6%) and Russell 2000 (+4.3%) led the way while developed (+2.2%) and emerging (+2.5%) markets lagged. Interest rates fell again across the curve leaving the 10yr UST yielding 3.66% and the 2yr 3.57% with the slope remaining in positive territory. The USD closed relatively flat while commodity markets were up roughly 1.5%, including oil which closed at $68.65.

Market Anecdotes

• Despite warmer inflation data making the case for 25 bps cut, futures markets moved suddenly toward a higher probability (50%) of a 50 bps rate cut last week with Dudley’s comments in Singapore and WSJ and FT articles making the case for 50bps.
• An interesting cross-asset class perspective from JPMorgan showed how bond markets and base metals are pricing in much higher recession probabilities than equity markets and credit spreads.
• The ECB delivered what markets were expecting, which was a second 25 bps deposit rate cut to 3.5% and a 60 bps cut to the refi rate to 3.65% in order to narrow the gap between the two.
• A Bloomberg article reiterated that while unemployment has increased from 3.7% to 4.2%, about half of the move has come from new entrants and reentrants who don’t find work immediately.
• BCA and Alpine Macro strategists continue to see a clear path to a Republican administration with gridlock highly likely due to the economy and/or simple quirks of the Electoral College. Budget deficits, trade protectionism, and governmental influence in the private sector remain the primary market focus.
• Not to be overlooked are the significance of China’s deflationary forces and economic challenges where prices have declined for five consecutive quarters, something we haven’t seen since the late 1990’s back when China represented only 3% of global GDP (> 20% today).
• Bloomberg highlighted the outflows occurring in Bitcoin ETFs, estimating investors are sitting on a record $2.2b in unrealized losses. Investor adoption has been overwhelmingly retail (75%-80%) with professional investors the remainder.

Economic Release Highlights

• August CPI YoY Headline (2.5% vs 2.6%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.3% vs 0.2%) were generally in line with consensus estimates.
• August PPI YoY Headline (1.7% vs 1.8%) and Core (2.4%) along with MoM Headline (0.2% vs 0.2%) and Core (0.3% vs 0.3%) were generally in line with consensus estimates.
• NFIB Small Business Optimism Index deteriorated versus the prior month and registered below the consensus estimate (91.2 vs 93.6).
• The UofM Consumer Sentiment Index (69.0 vs 68.0) improved slightly versus prior month and 1-year inflation expectations fell one tick to 2.7%.

Weekly Market Report: September 6th, 2024

While the soft landing narrative still seems in charge, the month of September started out with a pretty rough week. Some single name narratives combined with a dose of concerning economic data resulting in a 4.2% loss in the headline S&P 500 and sharply lower bond yields. Developed and emerging equity markets were both down approximately 3.5% while small caps and the NASDAQ (growth stocks) were both down close to 5%. Ten year and 2yr UST yields fell from 3.91% to 3.72% and 3.66% respectively last week, leaving the 2yr/10yr in positive slope territory for the first time in two years. WTI crude oil fell sharply (-10%) to close at $68.22/barrel.

Market Anecdotes

• Monetary policy narratives focused on a trio of labor market reports last week leaving Fed Funds futures pricing in more of a ‘front-loaded’ path with six cuts now priced in over the next four meetings. Markets still see probabilities at 70% for 25 bps and 30% for 50 bps on September 18.
• UST yields hit fresh 52-week lows this week which can be seen as a ‘tailwind’ for equities due to a lower discount rate, but the ‘tailwind’ can certainly manifest as a ‘headwind’ if the reason for declining yields is heightened risk of economic and earnings slowdown.
• Bespoke noted that, while a lower Fed Funds rate (and very short end of the yield curve) needs to wait for formal FOMC policy announcements, bond markets price in forecasted policy moves in real time, allowing new issuers of corporate bonds and ABS to enjoy lower rates now.
• If recession fears are rising, the high yield bond market certainly doesn’t see it with spreads at 3.29%, well below the long-term average of 5.32%.
• The 2yr/10yr yield curve spread closed in positive territory last week for the first time since July 2022. The 3mo/10yr remains deeply negative at -1.41%, not too far off the cycle low of -1.86%.
• While hard data and soft (survey) data are clearly positively correlated, a chart from MRB acts as a good reminder that soft data tends to ‘overshoot’ on both up and down swings leaving investors best served focusing on hard economic data and corporate earnings trends.
• Commodity markets have been very mixed this year with oil, agricultural commodities, and most industrial metals down on the year countered by a very strong year for gold.
• The U.S. budget deficit has averaged 2.57% of GDP since 1948 with a recessionary 2009 GFC deficit of 9.75% and 2020 pandemic deficit of 14.7%. The 2023 budget deficit was 6.3% with 2024 projected near 7%.

Economic Release Highlights

•  August payrolls came in below the consensus estimate (142,000 vs 160,000) and the unemployment rate declined from 4.3% to 4.2% as forecasted.
• Labor force participation was unchanged at 62.7% and average hourly earnings edged higher and came in above consensus forecast on both MoM (0.4% vs 0.3%) and YoY (3.8% vs 3.7%).
• The JOLT Survey in July reported a significant decline in job openings to 7.673M, well below consensus forecast of 8.1M and the prior month reading of 8.184M.
• ISM Services Index for August registered 51.5, remaining in expansionary territory and coming in slightly above the consensus forecast of 51.1. ISM Manufacturing Index for August registered 47.2, relatively in line with the consensus forecast of 47.5.
• The JPM Global Composite PMI (C,M,S) of (52.8, 49.5, 53.8) showed a slight improvement in composite and services readings offset by slight deterioration in manufacturing.
• The Fed Beige Book on qualitative economic backdrop reported “flat or declining” activity in nine of twelve Fed districts.

Weekly Market Report: August 30th, 2024

Market Anecdotes

• The hiking cycle of 2.5 years and 500 bps is set to end September 17-18 with limited data points between now and then, where markets firmly expect a Fed rate cutting cycle to begin, begging the question, which equity asset classes have historically benefitted the most?
• Second quarter S&P 500 earnings were up nearly 12% YoY with 74% of firms topping estimates, including Nvidia, last week, handily beating forecasted earnings ($0.68 vs $0.65) and revenue ($30b vs $28.9b).
• Alpine Macro published an interesting piece on AI concluding that a valuation premium exists due to market expectations of higher revenue, a boost to EBITDA, enhanced productivity, and higher GDP growth but it is not currently meeting the definition of bubble or mania. 
• Expectations for a soft landing path for the U.S. economy to transpire has increased notably since April as data indications have maintained a positive tone and model projections, including the Atlanta Fed GDPNow model have remained consistently above 2%.
• Along with the positive 2Q GDP revision last week, we received data on corporate profits which grew 1.7% pre-tax with after-tax aggregate profit margins edging higher from 15.2% to 15.4%.
• Housing market data last week reinforced the tepid outlook for the time being with inventory, rates, and prices posing tangible headwinds to prospects of any near-term recovery. 
• A Penn Wharton Budget model estimates that, despite spiraling national debt and massive budget deficits, both team R and team D are forecasted to deliver the status quo. 
• According to Bloomberg’s data set, as recently as 2017 passive mutual funds and ETFs accounted for 35% of assets. That grew to 50.1% in December 2023 and has continued its march higher with the July 2024 tally at 51.3%.

Economic Release Highlights

• August YoY PCE inflation was in line with expectations for both headline (2.5%) and core (2.6%) alongside MoM readings of 0.2% for both headline and core PCE. Personal income grew slightly more than forecast (0.3% vs 0.2%) and PCE was in line with spot consensus at 0.5%.
• 2Q U.S. GDP was revised higher in the second estimate from 2.8% to 3.0% thanks in large part to stronger personal consumption which was revised up from 2.3% to 2.9%.
• Consumer Confidence in August improved to 103.3 from July’s 101.9 reading, ahead of both the spot consensus 100.1 and forecast range of 99.5 to 103.0.,
• Case-Shiller Home Price Index for June rose 0.4%, more than the consensus forecast of 0.2%.
• Pending Home Sales in July fell 5.5%, well more than the forecasted 1.1% increase projected.
• Durable Goods Orders report for July jumped 9.9%, well in excess of the 4.5% spot consensus and above the high end of the forecast range of -0.3% to 9.0%.