Weekly Market Report: September 16, 2022

Markets last week had to digest a higher likelihood of a steadfast hawkish Fed in light of the economic calendar both here and abroad. Investors were again faced with little to no winners as equity markets and bond markets sank together, in what has been a clearly increasing pattern of rising rates/inflation anxiety corresponding to falling equity market prices. By the end of the week, the S&P 500 was within 5% of retesting the June lows and interest rates were at or above the June highs, depending on the term. The USD rallied in typical risk off/higher interest rate fashion while commodities broadly moved lower on the week.

Market Anecdotes

• A hot inflation reading on Tuesday may have reduced the odds of the Fed engineering a soft landing, offsetting increased soft landing odds stemming from last month’s employment report.

   

• That the aggressive pace of Fed rate hikes has markets on edge might be understandable given we’re looking at the fastest six-month pace of rate hikes since 1981, assuming 75bps this week.

   

• Futures markets have priced in an additional 50bps of rate hikes in recent days, to a terminal rate of 4.5% by April of 2023, which has been reflected in both economic forecasts and stock/bond market pricing as well.

   

• Happy endings have clearly not been the weekly trend in 2022 with more 1%+ down days ending the week than any year since 1952. This week was thanks in part to a very public warning of weakening earnings and slowing global growth from FedEx CEO Raj Subramaniam.

   

• A current look at market technicals shows the S&P 500’s rejection of the 200 daily moving average and subsequent breakdown toward the bear market low in June means the downtrend is still very much in place with markets again flirting with oversold technical conditions.

   

• Another look at positive stock and bond correlations and the resulting headwind to standard investment portfolios shows both shorter and longer term trends dramatically on the rise.

   

• Election cycles and mid-term predictions will now begin to ramp up warranting a look at which policy debates have market implications and requisite historical election cycle market patterns.

   

• Eurozone inflation is doing the ECB no favors as regional CPI marked record highs for eleven consecutive months.

Economic Release Highlights

• CPI for August reported MoM headline (0.1% vs -0.1%) and core (0.6% vs 0.3%) and YoY headline (8.3% vs 8.1%) and core (6.3% vs 6.1%). 
• The latest New York Fed Survey of Consumer Expectations show median 1yr, 3yr, and 5yr ahead inflation expectations falling 
• August Retail Sales increased 0.30% (vs expectations for -0.1%), a rebound from prior month’s -0.40% reading. 
• August’s NFIB Small Business Optimism Index improved to 91.8, slightly higher than expected (90.5) and a small improvement over the prior month (89.9). 
• UofM Consumer Sentiment improved from 58.2 in August to 59.5 in September. 
• Industrial Production in August softened 0.20%, a slowdown from prior month’s 0.50% growth.

Weekly Market Report: September 9, 2022

In a holiday shortened week, markets digested a large dose of FOMC speaking engagements, a very light economic calendar, and requisite geopolitical interference. The result was a pronounced rally across U.S. and developed non-U.S. equity markets with emerging markets ending flat to slightly down on the week. Interest rates continued their march higher with the yield curve moving up in parallel fashion leaving the 10yr UST at its highest level since the June 2022 bout of market volatility. The USD fell slightly on the risk rally and the commodity complex finished in the red with oil trading sideways but natural gas falling 9% on the week.

Market Anecdotes

• From an equity market technical perspective, it feels like the bears are in check until the June lows are taken out while the bulls are in check until the mid-August highs are taken out.
• It was a busy Fed speaking circuit last week with markets (perhaps foolishly) hoping for a second consecutive slowdown in CPI data taking the Fed hawkish narrative back a bit. The labor market and wage inflation may well just take the wheel for the hawkish narrative.
• Falling inflation data points are growing including Baltic Dry Index, Logistics Manager Index, WCI Shipping Rates, Warehousing/Transportation Pricing, ISM and regional Fed Delivery Times/Prices Paid/Prices Received, commodity prices, gas prices, vehicle prices, and rental prices.
• Fed whisperer Nick Timiraos published a WSJ article highlighting little pushback from FOMC members regarding expectations for a 75bps hike at the September FOMC meeting. Four minutes later, market probabilities for 75bps increased from 72% to 92%.
• Both the ECB and BoC announced 75bps hikes to their policy rates, larger than the 50bps consensus. The European rate now stands at 1.25%.
• Bond market carnage continued last week now with the Barclays Aggregate Index 1yr, 2yr, 3yr, and 5yr total returns all at the worst levels on record.
• The consensus case against imminent U.S. recession beyond pent up consumer demand (liquidity) and a robust job market is pent up capex where capital goods orders are near 1998 levels and the average age of fixed assets are at their ‘oldest’ since 1964.
• Lithium refineries, battery manufacturing plants, solar/wind power installs, and power grid investment are beginning in earnest in what is expected to total $1.2t in investment by 2035, spurred in part by the recently passed climate/infrastructure bill.
• Reuters reported this week that the U.S. Strategic Petroleum Reserve has fallen to its lowest level (442.5mb) since November 1984.
• The EU foreign policy chief and U.S. officials signaled a new Iran nuclear deal is not expected to happen anytime soon.
• An eventful (and somber) week in the UK saw the passing of Queen Elizabeth and the appointment of Liz Truss as the next Prime Minister.

Economic Release Highlights

• August ISM Services Index came in at 56.9 versus consensus forecast of 55.4, toward the higher end of consensus range of 53.5 to 57.0.
• Weekly initial jobless claims fell slightly WoW to 222k.

Weekly Market Report: September 2, 2022

Last week marked the unofficial end of summer, the beginning of a new school year, the end to a difficult August, and a lumpy opening for September. Markets digested the August jobs report and were forced to acknowledge the Fed’s resolve on inflation despite indications of a meaningful slowdown in the economic environment and what looks like the beginning of a slowdown in inflation data. Equity markets closed the week down over 3% with broad weakness across sectors. The yield curve was volatile at both ends of the curve leaving the 2yr/10yr still solidly in inverted territory (2y/10y) and rates higher across the curve. The 10yr closed the week up 16bps to 3.20%. Commodities fell sharply on slowing global growth concerns and we saw a +0.67% flight to quality rally in the USD.

Market Anecdotes

• After being way too dovish for way too long, the Fed seems intent on a path of the opposite extreme for the
  time being and markets are pricing in a corresponding economic contraction.
• The disconnect between market expectations and FOMC projections is being reconciled over the past couple of weeks. Strategas look at several macro indicators shows how conditions have clearly tightened over the past 45 days.
• Market technicals look mixed with the S&P 500 holding the 3,900-support level last week but Europe has already pushed itself back to June levels – suggesting U.S. markets may also revisit.
• Slowing global growth and the policy response to inflation have investors on edge. Percolating evidence of supply side and pandemic related disinflation may offer some glimmers of hope.
• The pain of rising interest rates is clear and translates to rising mortgage rates (30yr (5.66%), 15yr (4.98%), and 5/1 adjustable (4.51%)) exerting pressure on the housing market. Rates are also pressuring P/E multiples which sit near the midpoint of the range over the last ten years.
• Bloomberg noted some concern surrounding declining (but still record high) commercial bank deposits with the first QT ramp up set to begin in September – possibly a demand side technical concern but Bianco Research illustrated the case that there will be no selling of bonds/notes through 2024 at these levels.
• Last week in geopolitics saw the U.S. send two guided missile cruisers through the Taiwan Strait, a U.S. order to Nvidia and AMD to halt certain AI chip exports to Russia, China, and Hong Kong, hiccups in the Iran nuclear investigation, and Russia halting natural gas supply to Europe.
• The EU energy crisis with December and February sanctions looming has EU bound Russian gas being flared, the EU buying gas at any price, and a G7 agreement of a price cap on Russian oil.

Economic Release Highlights

• The August jobs report revealed 315,000 new jobs, just beyond the consensus forecast of 293,000 but the unemployment rate ticked 0.02% higher to 3.7%. The labor market participation also increased 0.02% to 62.4%.
• ISM Manufacturing Index for August stayed at 52.8, just above the spot consensus forecast of 52.0.
• The Case-Shiller Home Price Index rose 0.4%, less than the 1.1% consensus forecast.
• Consumer Confidence in August climbed to 103.2, ahead of the consensus estimate of 97.4 and above the high end of the range.
• The July JOLT survey showed 11.239mm job openings, well more than the consensus 10.4mm and above the high end of the range.

Weekly Market Report: August 26, 2022

Markets returned their focus to the macro backdrop last week and didn’t applaud what they saw and heard. We saw a relatively packed (and weak) economic calendar punctuated with the KC Fed Jackson Hole Economic Symposium where central bankers, academics, economists, and policy makers rubbed elbows and waxed poetic. By week’s end, U.S. equity markets had fallen between 3%-4% while emerging (+0.28%) and developed (-3%) international markets held up slightly better. Interest rates and the USD responded to hawkish Fed commentary with rates moving rates higher in the shorter maturities and an ensuing bid for the USD. Commodities rallied (+2.8%) with energy, grains, and metals strengthening across the board.

Market Anecdotes

• With all the hullabaloo, Bloomberg News made clear history’s suggestion that Jackson Hole speeches rarely mark a policy shift/turning point for the markets. That said, Powell and company certainly did a number last week. 
• The tenuous dance between the Fed and markets with slowing inflation readings pulling dovish market sentiment to levels the Fed seems determined to push back on for now. Market based monetary policy expectations shifted last week accordingly. 
• The ‘year of the 60/40 portfolio continues to deliver with both stock and bond markets both sitting over 10% in the red YTD and very little company from a misery loves company perspective. 
• After rejecting the 200dma last week, U.S. equity markets continued their retreat closing just above the 50 dma and feeling the pinch of higher rates and monetary policy headwinds. Deteriorating sentiment, however, should be viewed as a constructive contrarian indicator. 
• Fundamentals surrounding earnings and profit margins reinforce a note of caution with respect to the forward outlook and trends respectively. 
• Monday marked the first time in twenty years where a USD was worth more than a Euro. 
• Softness in the housing market from exuberant levels of late 2021 to early 2022 is apparent. Bianco Research examined several alternative measures also illustrative of both pricing trends and the technical backdrop. 
• A look at narrow market leadership and average correlations among stocks within the S&P 500 illustrate some of the primary headwinds for active managers in place since the GFC and era of central bank intervention policies. 
• China announced a $150bn stimulus package last week resulting in some positive momentum in emerging markets. Whether that’s material enough to matter remains the key question.

Economic Release Highlights

• July MoM PCE Inflation of headline (-0.1% vs 0.1%) and core (0.1% vs 0.3%) and YoY headline (6.3% vs 6.3%) and core (4.6% vs 4.7%) both came in slightly below estimates. 
• July Personal Income (0.2% vs 0.6%) and Personal Consumption Expenditures (0.1% vs 0.4%) both came in softer than expected. 
• August U.S. PMIs (C, M, S) continued to contract in August with readings of 45.0, 51.3, 44.1, all missing and coming in at or below the lowest end of consensus range. 
• August EZ PMIs (C, M, S) of 49.2, 49.7, 50.2 all came in slightly higher than consensus while Japan’s readings of 48.9, 51.0, 49.2 moved slightly lower versus the prior month. 
• July New Home Sales (511k) came in under consensus of 575k and below the low end of the range of forecasts. July Pending Home Sales of -1% was slightly better than -2.5% forecasted. 
• The final UofM Consumer Sentiment Index for August was revised notably higher to 58.2, well above the point estimate of 55.1 and range of 55.1–56.0. 
• July Durable Goods Orders (0.0% vs 0.5%) missed on the headline but beat on the ex-transportation (0.3% vs 0.1%) reading and core capital goods posted growth of 0.4%.

Weekly Market Report: August 19, 2022

Markets last week digested a relatively light economic calendar but ended the week on a downbeat with interest rates pressuring equity markets to finish in the red. An arguably overbought S&P 500 rejected the 200-DMA pretty squarely while developed (-3%) and emerging (-2.8%) international markets declined more than overall U.S. markets. Interest rates moved higher on the week, particularly out beyond three-year maturities, putting the 10 year UST just under the closely watched 3% level. Commodities were down slightly while the risk off tone and rise in U.S. rates to end the week resulted in a strong bid for the USD. 

Market Anecdotes

• A look at global central bank policy rates illustrates how synchronized the world is (tightening) but also how deeply negative central bank rates still are considering inflation (real policy rates). 
• Softening inflation headlines have translated to easing overall financial conditions (stocks, credit spreads, weaker dollar) and market expectations of an easier Fed policy in 2023. Meanwhile, growth metrics (employment, GDP, PMIs) have held up relatively well. 
• The strong July jobs report viewed along with trends in initial claims and wage pressures leaves us feeling a bit more caution as we look forward. 
• Recent investor and fund manager survey data reflect some increasing optimism surrounding both equity markets and overall growth expectations. 
• Acknowledging the bear market selloff was almost exclusively expressed in P/E multiple compression, an updated look at S&P 500 composition and valuations illustrates how quickly rally has brought the top-heavy composition/valuation concern back into play. 
• The rising interest rate impact on housing is clear but a look at the high yield bond maturity wall illustrates potential refinancing issues don’t present themselves until 2025 and beyond. Expected twelve-month default rates have fallen from 8.1% to 5.2%. 
• The Baker Hughes rig count data illustrates a production recovery from year ago levels with U.S. (+51%), Canada (+29%), and International (+11%) all increasing notably. 
• With midterms approaching, political analysts are stepping up their forecasts with projections of a divided Congress and a plethora of Trump 2.0 storylines. Key takeaways are limited legislative pathways translating to ample executive agency and debt limit/shutdown debates.

Economic Release Highlights

• July MoM Retail Sales (0.0% vs 0.1%) were flat but the ex/vehicles (0.4% vs -0.1%) and ex/vehicles & gas (0.7% vs 0.3%) both handily exceeded expectations. 
• July Existing Home Sales of 4.81mm was below the 4.85mm forecast and growth rates of -5.9% MoM and -20.2% YoY both declined notably versus prior month levels. 
• August Housing Market Index collapsed in July to 49, far below the spot forecast of 55 and predicted range (53-58) for the month. • July Housing Starts (1.446mm vs 1.540mm) and Permits (1.674mm vs 1.650mm) missed and exceeded estimates accordingly. 
• July Industrial Production (0.6%a vs 0.3%e) beat consensus as did the manufacturing output component (0.7%a vs 0.2%e). 
• Regional Fed Philly (6.2 vs -5.0) and Empire State (-31.3 vs 5.0) Manufacturing Indices provided mixed readings on manufacturing activity for the month of July.