Weekly Market Report: March 1st, 2023

Markets closed out the month of February with the equity markets in the U.S. (+1%) and developed international (+0.78%) posting solid gains. The impressive run in the U.S. large cap space has enabled the S&P 500 to close higher in 16 of the past 18 weeks, something we haven’t seen in over 50 years. Economic data carried a softening tone last week which allowed bonds to rally. Slightly softer U.S. growth data helped Treasuries rally last week taking 10yr yields back down below 4.2% and the USD slightly down on the week. WTI crude oil closed up 2.5% to $79.97, touching the $80 level briefly for the first time since November.

Market Anecdotes

• A strong start to 2024 with back to back monthly gains despite the hawkish repricing of Fed policy expectations has been notable with consistently favorable financial conditions, resilient growth, and solid earnings from big technology companies leading the way.
• Markets have priced roughly half of the rate cuts projected at the beginning of the year and are now relatively in line with the FOMC dot plot with the first cut (54% probability) expected in June.
• A strong labor market, the healthy consumer, and strong productivity growth have contributed to the constructive outlook while disinflation seems to be losing a little steam.
• A big rally in Chinese stocks feels more like a policy-driven rebound due to several measures intended to prop up the market while macro data has remained lackluster and industrial metals have yet to catch a bid, suggesting patience may be in order.

Economic Release Highlights

• The pace of headline (core) PCE inflation declined slightly in January and was in line with forecasts, registering 2.4% (2.8%) YOY and 0.3% (0.4%) MOM. Personal Consumption of 0.2% was in line but Personal Income growth of 1.0% was well above the 0.4% forecast.
•  U.S. ISM Manufacturing Index slipped from 49.1 to 47.8 in February, missing the consensus forecast of 49.5.
• January Durable Goods Orders declined 6.1%, slightly more than the -4.5% forecast. Also reported were Ex- Transportation (-0.3% v 0.2%) and Core Capital Goods (0.1% v 0.1%).
• Consumer Confidence in February (106.7 v 115.0) missed and registered below the consensus range.
• 4Q U.S. GDP was revised down from 3.3% to 3.2% but Personal Consumption Expenditures were revised up from 2.8% to 3.0%.
• New Home Sales of 661k registered slightly below the consensus forecast of 685k. Pending Home Sales declined 4.9% versus consensus forecast of 0.8% and a range of -2.5% to 4.6%.

Weekly Market Report: February 23rd, 2023

A President’s Day holiday-shortened trading week with a relatively light economic calendar looked to the ‘AI tipping point’ narrative, encouraging earnings reports, and a continued healthy economic growth backdrop taking U.S. (and Japan!) equity markets to fresh record highs. The S&P 500 closed up 1.7% (6.7% ytd) with non-U.S. markets following suit in both developed +1.9% (2.7% ytd) and emerging +1.8% (1.0% ytd) markets. Bond yields were relatively flat with the 10yr falling 4bps to 4.26% while commodities (-1.4%) and the USD (-0.34%) were down slightly.

Market Anecdotes

• Early week market consolidation gave way to an AI-related earnings jolt, pushing the S&P 500 up 2% and the NASDAQ up 3%, both to record highs – something we haven’t seen since March 2000.
• A Bespoke look back at major technology releases in light of the AI momentum led to an analysis of eight ‘AI’ ETFs which contained 67 S&P 500 companies therein and several constructive performance illustrations going back to the ChatGPT release on 11/30/22.
• Several Fed speaking engagements and FOMC and ECB meeting minutes released last week served to reinforce further hawkish repricing of rate cut expectations which have already fallen from seven rate cuts to approximately three for the year.
• An article in Bloomberg highlighting an Attom report on the looming issues across commercial real estate showed January foreclosures up 17% MOM and twice as many as January 2023. Meanwhile residential mortgage rates have risen three consecutive weeks, now back to 7.3%.
• The JPM CEO disclosed a significant ‘estate planning’ move last week in selling $150mm of JPM stock, which based on his prior uncanny timing, investors may be well served to take note.
• The PBOC announced another surprise policy decision, delivering a record cut to a key mortgage reference lending rate. Markets again were largely unimpressed.
• BCA’s FX Strategists have modeled the USD as the most overvalued currency across all developed and emerging currencies globally at +19.1%.

Economic Release Highlights

• January YOY headline and core CPI registered (3.1% vs 3.0%) and (3.9% v 3.7%) respectively with MOM readings of (0.3% v 0.2%) and (0.4% v 0.3%).
• January YOY headline and core PPI registered (0.9% v 0.7%) and (2.0% v 1.7%) respectively with MOM readings of (0.3% v 0.1%) and (0.5% v 0.1%).
• Retails Sales in January fell well short of forecast (-0.8% v -0.1%). Ex-Vehicles (-0.6% v 0.2%) and Ex-Vehicles & Gas (-0.5% v 0.2%) also missed.
• Industrial Production in January missed the spot forecast (-0.1% v 0.2%) as did Manufacturing Output (-0.5% v -0.1%) and Capacity Utilization (78.5% v 78.8%) also fell short.
• January’s NFIB Small Business Optimism Index declined and came in below consensus forecast (89.9 v 92.4).
• UofM Consumer Sentiment reading for January registered 79.6, in line with the consensus forecast of 80.0. One year inflation expectation increased from 2.9% to 3.0%.
• The Housing Market Index for February came in above forecast (48 v 46).
• Housing Starts (1.331M) and Permits (1.470M) in January both came in below the spot consensus and the forecast range.

Weekly Market Report: February 16th, 2023

Markets last week took in more fourth quarter earnings reports and a relatively heavy economic calendar. Bond markets couldn’t look past the warm CPI and PPI reports, pushing yields up 10-15 bps as questions surrounding the disinflation trend and related monetary policy implications surfaced. Equity markets were mixed as leading technology names took a breather while small caps and value stocks enjoyed a rare bout of leadership. Developed international (+1%) and emerging international (+1.26%) both outpaced the S&P 500 (-0.4%) on the week. Commodity markets were flat despite oil rallying 3%, closing just shy of $80, and the USD was relatively flat.

Market Anecdotes

• Last week’s inflation report sparked bond yields and more questions surrounding the ‘last leg’ or final stages of getting inflation back to the Fed’s target.
• Powell’s emphasis on ‘supercore’ CPI, which has risen (YOY) three straight months, contributed to traders pushing rate cuts further out into the future in a higher for longer narrative.
• With the market being talked out of the 7 rate cuts priced in on January 12th to 4 rate cuts most recently, it begs the question, what exactly drove equity markets 4% higher over this timeframe?
• Fed speaking engagements last week continued to push back on market rate cut expectations including Bostic, Daley, and Barkin noting ‘messy’ inflation data, ‘more work to do’, and expectations for two (not four) cuts this year.
• In an eyebrow raising feat, Nvidia overtook Alphabet from a market cap standpoint last week despite the former’s net income being greater than the latter’s revenue. A simple regression of P/E multiples and subsequent five-year returns reminds us that valuations do matter.
• Fourth quarter earnings season, with 80% of the S&P 500 reported, has a beat rate of 75% and beat margin of 3.9% alongside blended earnings growth of 3.2% and revenue growth of 4.0%.

Economic Release Highlights

• January YOY headline and core CPI registered (3.1% vs 3.0%) and (3.9% v 3.7%) respectively with MOM readings of (0.3% v 0.2%) and (0.4% v 0.3%).
• January YOY headline and core PPI registered (0.9% v 0.7%) and (2.0% v 1.7%) respectively with MOM readings of (0.3% v 0.1%) and (0.5% v 0.1%).
• Retails Sales in January fell well short of forecast (-0.8% v -0.1%). Ex-Vehicles (-0.6% v 0.2%) and Ex-Vehicles & Gas (-0.5% v 0.2%) also missed.
• Industrial Production in January missed the spot forecast (-0.1% v 0.2%) as did Manufacturing Output (-0.5% v -0.1%) and Capacity Utilization (78.5% v 78.8%) also fell short.
• January’s NFIB Small Business Optimism Index declined and came in below consensus forecast (89.9 v 92.4).
• UofM Consumer Sentiment reading for January registered 79.6, in line with the consensus forecast of 80.0. One year inflation expectation increased from 2.9% to 3.0%.
• The Housing Market Index for February came in above forecast (48 v 46).
• Housing Starts (1.331M) and Permits (1.470M) in January both came in below the spot consensus and the forecast range.

Weekly Market Report: February 9th, 2023

A light economic calendar last week allowed markets to focus on a full roster of fourth quarter earnings reports and a heavy dose of Fed speak with twelve speaking engagements on the calendar. In a micro over macro week, equity markets pushed to new record highs with the S&P 500 (+1.4%) closing above 5,000 for the first time. Developed markets stayed relatively flat (+0.2%) while emerging markets (+2.4%) benefited from rumors of additional stimulus measures percolating in China which rallied 4.4% on the week. Bond yields have latched onto the sustained growth narrative, rising 10-15 bps in what has been a rough start to 2024. The USD added marginally (+0.18%) to the strength it has seen so far in 2024 (+2.74%) and oil clawed back most of last week’s losses, rising 6.3% for the week, now up 7.2% in 2024.

Market Anecdotes

• The S&P 500, up 14 of the past 15 weeks, closed above the 5,000 mark for the first time and set a new record high giving financial media types an easy storyline this week. An increasingly narrow rally at the top end of the index is giving some investors pause.
• David Einhorn pointed out some obvious concerns surrounding the growth of passive (now 53% of U.S. AUM) and algorithmic investing noting “Passive investors have no opinion about value. They just assume everybody else has done the work” and “Algos have an opinion about price, like what is the price going to be in 15 minutes?”
• S&P 500 earnings results continued to improve from the difficult start with blended earnings growth up to 2.9% with a beat rate of 75% and a beat margin of 3.8%.
• Rumblings at NYCB have investors worried about regional banks but the balance sheet looks notably different from SVB and FRB situations last March but the slow moving CRE trainwreck most definitely has more chapters to play out.
• Bespoke noted the two day surge in the 10yr bond yields (+28.4 bps) following the January jobs report is the second largest of the current cycle with the largest being the yield spike leading up to a surprise 75 bps Fed rate hike in June 2022.
• The FOMC speaking circuit last week pushed back on both timing and scope of market rate cut expectations while reiterating a patient but ultimately easing bias. ISM Services prices paid last week are worth noting with the disinflation trend a key lynchpin for risk assets looking forward.
• Jobs and PMI readings have taken the most recent Atlanta Fed GDPNow model estimate of 1Q growth up from 3.0% to 3.4%.
• Last week’s annual BLS CPI revisions, which Fed Governor Waller highlighted the importance of, revealed minor downward revisions to headline Oct-Dec readings but core readings were unchanged.
• Hulbert Ratings illustrated a clear case of mean reversion with high yield credit spreads as tight as they are today (3.38%) showing the coming 12 or 24 month change favors a clear gap higher.
• The January senior loan officer opinion survey showed banks continuing to tighten lending standards and terms, more in line with economic downtrends than the uptrend we’re seeing.
• News of President Xi Jinping’s intent to focus on economic and financial market challenges sprouted some optimism in China for potential government assistance and regulatory measures.

Economic Release Highlights

• January ISM Services Index beat consensus (53.4 vs 52.1) and registered above the high end of
• the forecast range (51.5 – 53.0).
• Initial (weekly) jobless claims were relatively in line at 218,000, moving the 4-week moving average to 212,000.

Weekly Market Report: January 26th, 2023

Last week, markets took in a healthy dose of both economic and earnings reports, moving equity markets higher globally. U.S. large caps were up 1% to a new record high while small caps added 1.75%. Participation was relatively broad, led by the energy and communication services sectors. International developed (+1.5%) and emerging (+1.3%) outperformed thanks in part to a bounce in Chinese equities. Interest rates were relatively unchanged despite the encouraging economic news, but commodity markets rallied sharply with energy markets leading the way as WTI oil surged 6.3% to $78.01 on the week.

Market Anecdotes

• Central banks in or beginning easing cycles alongside healthy economic indications (GDP, labor, inflation) have overshadowed a sub-optimal start to fourth quarter earnings season.
• The FOMC meeting on tap this week is focused on quantitative risk assessment with no policy announcements expected. Markets have been walking back 2024 rate cut expectations (from 6 to 5) but resilient growth and consumption may still challenge that further.
• With 25% of S&P 500 companies reported, the beat rate is 69% and beat magnitude is -5.3% with blended earnings of -1.4% and revenue growth of 3.2%. The 12-month forward P/E multiple is 20x.
• Chinese policy makers, responding in part to nearly $6t in losses across mainland and Hong Kong equity markets since February 2021, announced stimulus headlines last week including a PBoC 0.5% RRR rate cut and a possible CNY 2t stock market rescue package.
• BCA’s Geopolitical team’s annual look at low probability, high impact market risks include a Chinese recession, oil shock in Iran, and military conflicts with Russia/East Asia.
• Despite higher interest rates pressuring corporate debt coverage levels, leveraged loan default rates have remained below historical averages due to a significant increase in ‘distressed exchanges’ which include out of court restructurings, exchanges, and sub-par paybacks.
• The spot Bitcoin ETFs launched on January 11th have thus far been a “sell the news” illustration, down over 20% while equity markets have grinded higher.
• To put a number on higher mortgage rates, a mortgage loan today is over 2% higher than any time since 2011 which equates to $385/mo on a $300,000 conforming 30-year loan.

Economic Release Highlights

• The pace of headline (core) PCE inflation fell in November registering 2.6% (2.9%) YOY and MOM readings of 0.2% (0.2%), both generally in line with consensus. Personal Consumption exceeded forecasts (0.7% vs 0.4%) and Personal Income growth of 0.3% was in line.
• The first estimate of 4Q GDP came in well above consensus (3.3% vs 2.0%) and the high end of the forecast range (1.3% – 2.5%).
• Personal Consumption Expenditures of 2.8% in 4Q cooled slightly from the 3Q rate of 3.1% but beat the spot forecast of 2.5% and above the high end of forecast range (2.4% – 2.6%).
• January U.S. PMI (C, M, S) registered 52.3, 50.3, 52.9 where both services and manufacturing readings came in well above consensus forecast and the high end of their respective ranges.
• January non-U.S. PMI (C, M, S) last week included relatively constructive readings in the Eurozone (47.9, 46.6, 48.4) and UK (52.5, 47.3, 53.8).
• Durable Goods Orders were mixed in December with a miss on New Orders (0% vs 1%), a beat on ex-Transportation (0.6% vs 0.2%), and a beat on Core Capital Goods (0.3% vs -0.2%).
• New Home Sales in December of 664k came in slightly ahead of the spot consensus forecast of 660k and increased slightly over the prior month’s 615k pace. Pending Home Sales jumped 8.3% on the month, well ahead of the 1.3% spot consensus and 0.7%-3.9% forecast range.

Weekly Market Report: January 19th, 2023

Markets took in a good deal of central bank pushback and some firmer economic data last week very much in stride. A tech and shadow tech rally pushed the S&P 500 to a new record high despite yields drifting higher in two of the past three weeks. The S&P 500 climbed 1.17% while international developed (-1.1%) and emerging (-1.7%) both declined. Bond yields were up across the curve with the belly (2s, 3s, 5s) up over 25 bps. The USD strengthened 0.86%, up 1.9% to begin the year, while commodity markets and WTI oil ($73.41) were both relatively flat on the week.

Market Anecdotes

• The S&P 500, which has been up 11 of the past 12 weeks, marked a new all-time high for the first time since January 3, 2022 last week. Interest rate relief, disinflation/growth outlooks, the AI/”Mag 7” rally, and multiple expansion explain most of the recent move.
• Metrics indicating softening demand for labor (more of a leading indicator), would include declining job openings, hiring rates, temporary employment, business survey hiring intentions, quits rate, and average hours worked – all seemingly flashing yellow as we look into 2024.
• A still robust liquidity backdrop provides a constructive backdrop for risk assets and can also mitigate risks of protracted downturns as liquidity sometimes serves as a support mechanism in market dislocations.
• Nine FOMC speaking engagements last week in advance of the month end FOMC meeting served to cool dovish market expectations, taking rate cut probabilities down to 46% for the upcoming March 20th meeting and now pricing 140 bps of easing for the year, down from nearly 175 bps.
• Fourth quarter earnings are off to a subpar start with a beat rate of 62%, a beat magnitude of -18.1%, and a blended -1.7% earnings result. Blended revenues are growing at 2.9%. Misses at this early stage in the financial sector account for the weak start.
• A Goldman research note highlighted how the record lack of financial (rate) incentive to refi outstanding mortgages is translating to anemic existing home sales albeit in what can only be categorized as a resilient U.S. housing market.
• With all the focus on global shipping choke points, Peterson Institute for International Economics published an interesting paper on long term trends in global trade cycles and globalization.
• BCA noted the fall in oil prices in the back half of 2023 can be partially attributed to an 880k b/d surge in U.S. production to record high levels thanks to a flood of DUC shale wells coming online.

Economic Release Highlights

• December Retail Sales beat on headline (0.6% vs 0.4%), Ex-Vehicles (0.4% vs 0.2%), and Ex-Vehicles & Gas (0.6% vs 0.3%).
• Consumer Sentiment Index in January improved from 69.7 to 78.8, above the spot forecast 69.2 and consensus range 66.5-72.5.
• Housing Market Index climbed in January to 44 from prior month reading of 37 and ahead of consensus forecast of 38.
• December Housing Starts (1.460M vs 1.425M) and Permits (1.495M vs 1.478M) both came in slightly ahead of forecasts. Existing Home Sales of 3.78M were down 1% MOM and -6.2% YOY.
• Industrial Production in December grew 0.1%, slightly ahead of the -0.1% consensus estimate.