Weekly Market Report: October 4th, 2024

Market Anecdotes

• The strong PMIs and labor report last week moved Fed Funds rate cut expectations decidedly back toward a 25 bps cut on November 7th, triggered a rally in the USD, moved U.S. Treasury yields sharply higher, and the entire Treasury curve last week on constructive economic reports
• The U.S. and Federal Reserve have plenty of company across developed markets as other central banks are pivoting to rate cuts in response to waning inflation and growth concerns.
• U.S. GDP, which has only seen one quarter since Q2 2022 where the economy posted growth below the 2.0- 2.5% long run potential, is bolstering those in the “no-landing” camp.
• A historical look from Market Desk and Ned Davis at prior rate cut cycles and ensuing returns for the S&P 500 reminds how important it is to get the call on the economy correct and that the bull market, at only two years old, is far from dying of old age.
• Conflict in the Middle East was again on full display last week between Israel and her adversaries leading to a surge in oil prices and increasing uncertainty across the region.
• Improving prospects for China on the back of recent stimulus announcements and implications for a weaker USD have placed more attention on developed international equity markets and Europe in particular with relative valuations providing additional support.
• A tentative agreement was reached between dock workers on the East and Gulf coast ports but there was no discernable market reaction given the short duration of the conflict.
• The $1.5t wall of loan maturities across the U.S. commercial real estate market presents a wide array of challenges and opportunities in what will likely be a slow evolving recovery.
• The U.K’s Office of Budget Responsibility published work on the fiscal impact of migrants at different wage/skill levels showing high and middle income migrants are net positive contributors to the government purse whereas the average U.K. resident and low income migrants are net negatives.

Economic Release Highlights

• The September jobs report was a blockbuster with 254,000 new jobs, well above the spot forecast of 132,000 taking unemployment down from 4.2% to 4.1%.
• Average Hourly Earnings grew above estimates for both MoM (0.4% vs 0.3%) and YoY (4.0% vs 3.7%) and Labor Market Participation stayed at 62.7%.
• The August JOLT Survey showed 8.040M job openings, an increase over the prior month’s 7.63M and well above the spot forecast of 7.7M.
• The September ISM Services Index registered 54.9, well above the prior month and consensus forecast where both were 51.1.
• The September ISM Manufacturing Index registered 47.2, unchanged from the prior month and slightly below consensus forecast of 47.6.
• The JPM Global Manufacturing PMI registered 48.8, down from the prior month read of 49.5. The Composite and Services readings both deteriorated from 52.8 to 52.0 and 53.8 to 52.9.

Weekly Market Report: September 27th, 2024

Market Anecdotes

• China announced a range of measures to support its stock market and economy including lowering mortgage rates, policy rates, and down payment requirements. Additionally, a surprise Politburo meeting addressed fiscal and housing market initiatives and the PBoC expanded allowable collateral for stock market investing. Implications are wide ranging.
• Of note is that oil markets have been on the outside looking in on the rally in global growth sentiment, particularly given this week’s developments in China. Supply side dynamics of OPEC+ and U.S. production are likely culprits to the decline in oil prices to nearly three-year lows.
• The key FOMC policy question with significant implications for equity and bond markets is how fast and how deep does the rate cut cycle develop with data on inflation dynamics and labor market conditions the primary drivers.
• Last week’s bond market reaction to the 50bps FOMC rate cut caught our attention as yields moved slightly higher (inflation risk) as opposed to trending lower (‘behind the curve’ risk).
• Several FOMC speaking engagements last week were focused on defending the 50 bps rate cut due to concern with downside risks to the labor market.
• A potential dockworkers’ strike at 36 U.S. ports receiving over 40% of inbound container volume poses a material short-term risk to supply chains and inflation dynamics.
• Annual BEA data revisions have taken GDP growth notably higher but maybe more importantly, savings rates also notably higher.
• Easier monetary policy and soft landing traction are key contributors to the broader risk on sentiment in markets with soft inflation data and healthy GDP forecasts paving the way.
• The biggest geopolitical concern today is significant escalation in the Middle East including sustained direct or proxy Israel-Iran conflict on which Alpine Macro is placing a 60% likelihood.
• The latest on POTUS election probabilities is best described as trending toward a Harris win but overall, too close to call. Betting markets (52%-47%), FiveThirtyEight polls (48.3%-45.6%), Silver Bulletin (dead heat), and Silver Bulletin (electoral college 53.7%-46.0%) slightly favor Harris.

Economic Release Highlights

• The September release of PCE inflation saw headline (2.2% vs 2.3%) coming in slightly below and core (2.7%) in line. MoM inflation registered 0.1% for both headline and core with the former in line and the latter slightly below estimates.
• Personal income growth of 0.2% and Personal Consumption Expenditures of 0.2% both came in below estimates and registered at the low end of the forecast range.
• September U.S. PMIs (C,M,S) registered 54.4, 47.0, 55.4 where the Composite came in ahead of forecast and relatively in line with prior month while services beat consensus (55.2) and manufacturing missed (48.5).
• Non-U.S. PMIs (C,M,S) in September include Eurozone (48.9, 44.8, 50.5), U.K. (52.9, 51.5, 52.8).
• Durable Goods Orders for August came in above forecast with New Orders (0% vs -2.7%), Ex-Transportation (0.5% vs 0%), and Core Capital Goods (0.2% vs -0.2%) all beating estimates.
• Conference Board Consumer Confidence Index declined to 98.7 in September from 103.3 prior month and well below the spot consensus of 103.0
• The Case-Shiller Home Price Index appreciated 0.3% MoM and 5.9% YoY, in line with forecasts.
• New Home Sales for August of 716k were slightly above the consensus forecast of 700k. Pending Sales grew 0.6%, slightly below consensus estimate of 3.1%

Weekly Market Report: September 20th, 2024

Market Anecdotes

• U.S. equity markets cheered policy developments last week with the S&P marking a new record high as economic soft landing optimism prevailed.
• The Atlanta Fed GDPNow model is currently forecasting 2.9% GDP growth for the third quarter.
• Strategas made note that a key to the soft landing scenario is the need for struggling areas of the economy (manufacturing, housing) to turn up before the softening labor market dries up services spending.
• With the cutting cycle officially underway, markets have more clarity on monetary policy, but we expect questions will persist regarding the overall path of the economy and geopolitics.
• The FOMC ushered in a new era of easing by delivering a notable 50 bps rate cut, leaving markets to handicap exactly where and how fast the target policy rates will go with the median SEP suggesting two more 25bps cuts remaining this year.
• Futures markets were quick to price in a slightly more aggressive pace of easing this year with a 75% probability of getting 75 bps of easing by year end.
• There has been and will continue to be ample debate surrounding what the “neutral” interest rate is for the U.S. economy. Of note is that Powell acknowledged the neutral rate is “probably significantly higher” than what it was pre-pandemic.
• Full cycle easing expectations given the Fed’s estimated neutral rate would see 7 or 8 rate cuts but markets are pricing in closer to 8 or 9 rate cuts over the coming year.
• The PBOC and BoJ conducted policy meetings last week as well with both opting to maintain rates at current levels.

Economic Release Highlights

• Retail Sales grew 0.1% in August, above the spot forecast of -0.3%. Ex-Vehicles (0.1% vs 0.3%) and ExVehicles & Gas (0.2% vs 0.3%) readings both came in slightly below consensus.

• Existing Home Sales in August registered 3.860M, slightly under the spot forecast of 3.90M but within the
  consensus range.

• Housing Starts (1.356M) and Permits (1.475M) both came in slightly above forecasts for August.

• The Housing Market Index registered 41, in line with both the spot consensus (42) and forecast range of 38-
  42.

• Industrial Production in August handily exceeded forecasts (0.8% vs 0.1%) and the consensus range of 0% to
  0.5%.

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.