Weekly Market Report: December 15th, 2023

A dovish FOMC pivot, moderating inflation, and a generally in line slate of economic reports pushed equity markets to another strong week of gains. The yield curve flattened and yields again fell sharply, leaving the 10yr yield below the 4% level. The USD weakened notably (-1.4%) as other central bank narratives weighed in a bit more hawkish than the Fed. Commodities were up 1% on the back of a rally in industrial metals while WTI oil was relatively flat, closing at $71.43, down 11.9% on the year and down 24.3% since its 9/27/23 peak for the year.

Market Anecdotes

• Seven consecutive up weeks on the S&P 500, something we’ve only seen 10 other times since 1990, led Goldman Sachs to note the market has reached its most overbought level (RSI >70) in over a decade. Forty- six percent of stocks are trading with a 14-day RSI>70, the most in 30 years.
• Last week’s FOMC meeting left rates unchanged as expected at 5.25%-5.50% with markets focused on the SEP, dot plot, and Powell’s remarks. While the statement continued to indicate the Fed is prepared to hike further, Powell’s remarks made clear they are at or near the peak.
• U.S. monetary policy focus has been changed to the timing of rate cuts. A look back at the historical span between the last rate hike and initial rate cut shows a range of 4 to 15 months, with an average of 8.
• While markets are certainly in celebration mode, the prospect of sticky inflation or second wave inflation remains a tangible risk as evidenced by near term moving averages of both the Cleveland and Atlanta Fed. inflation models.
• After 11 consecutive hikes and stepping aside at their October meeting, the ECB again kept rates on hold at 4.5%. 14 successive hikes and two pauses saw the BoE again leave rates at 5.25% as did the SNB (1.75%).
• The sharp decline in bond yields comes with several constructive implications including lower cost of debt across both the public and private sector, a tailwind for equity market valuations, and increased home buying activity which can spur factory orders and the manufacturing sector.
• The unemployment rate fell in November from 3.9% to 3.7% warranting a check in on Sahm rule and Joshi rule recession indicators with the latter rising from 0.153 to 0.169, closing in on the key 0.20 threshold.

Economic Release Highlights

• Headline and core CPI rose in November 3.1% and 4.0% with MOM readings of 0.1% and 0.3% respectively, all relatively in line with consensus forecasts.
• U.S. PMI (C, M, S) saw manufacturing come up short, but services exceeded their respective forecasts registering (51.0, 48.2, 51.3) in the December flash.
• Eurozone and U.K. PMIs (C, M, S) for the December flash registered (47.0, 44.2, 48.1) and (51.7, 46.4, 52.7) respectively.
• November Retail Sales grew 0.3%, well ahead of the spot consensus -0.1%. Both ex-vehicles (0.2% vs -0.1%) and ex-vehicles & gas (0.6% vs 0.1%) beat forecasts as well.
• NFIB Small Business Optimism Index registered 90.6, generally in line with forecasts but still below the long- term historical average of 98.
• Industrial Production grew 0.2% slightly below 0.3% forecasts and toward the bottom of the 0.1%-0.7% forecast range.

Weekly Market Report: December 8th, 2023

The S&P 500 and NASDAQ delivered a sixth consecutive weekly gain, both marking fresh highs on the year. Economic reports showing a still resilient U.S. labor market, some AI hype, and a healthy uptick in consumer sentiment were key drivers last week where soft landing and peak Fed narratives remained firmly in place. Last week saw bond yields break a streak of six consecutive weekly declines with the curve flattening and yields rising 10-15bps in the belly. Oil prices (and commodities) maintained their downward momentum, closing the week just above $71/bbl while the USD strengthened 0.71%.

Market Anecdotes

• As we approach year-end, a quick look at stock and bond market returns should make investors feel relatively jolly as we head into the end of the year, particularly as it compares to last year.
• An article by Robert Armstrong in the FT connects the November risk asset rally to soft landing/peak Fed narratives but also very much to the significant increase in liquidity from the NY Fed RRP which Bianco Research estimates accounts for more added liquidity than QT has withdrawn.
• A look at Chinese stocks versus U.S. or global stocks reminds investors of the many issues facing the country including real estate excess, timid stimulus, elevated debt levels, and overall deflation which does seem to be translating to a balance sheet recession dynamic in China.
• The healthy jobs report last week pulled bond yields higher and expectations of Fed rate cuts in 2024 lower but details show the number of job losers actually rose but was offset by an increase in people re-entering the job market (participation rate).
• BCA noted an interesting disconnect between copper prices and cyclical vs defensive equity dynamics where copper has declined on the year, but cyclicals have outperformed defensives.
• Prevailing ‘soft landing’ optimism among economists and strategists seems to be shared by sell side analysts, currently forecasting 2024 earnings and revenue growth of 10.4% and 4.75%, respectively, with four consecutive quarters of positive earnings growth.

Economic Release Highlights

• The November Jobs Report showed 199,000 new jobs, slightly better than the 180,000 consensus estimate. The unemployment rate fell from 3.9% to 3.7%. The participation rate increased to 62.8% and average hourly earnings of 0.4% MOM and 4% YOY were in line with forecasts.
• The November ISM Services Index registered 52.7, slightly higher than consensus forecast of 52.4 and an improvement relative to October’s 51.8.
• Non-U.S. PMIs (C, S) released last week included Global (50.4, 50.6), China (51.6, 51.5), India (57.4, 56.9), Eurozone (47.6, 48.7), and the UK (50.7, 50.9).
• October’s JOLT Survey reported 8.733M job openings, well under the consensus 9.4M expected.
• December’s U of M Consumer Sentiment Index of 69.4 was well above forecast of 61.9 and prior month of 61.3. The one-year inflation expectation decreased from 4.5% to 3.1%.

Weekly Market Report: December 1st, 2023

Last week markets digested a very busy economic calendar and Fed speak from a dozen speaking engagements sprinkled throughout the week. Continued peak Fed and soft-landing narratives helped equity markets post a fifth consecutive week of gains. We saw some rotation out of year to date winners (magnificent 7) and broader participation across markets. Treasuries continued to rally with bond yields falling across the curve, leaving the 10yr UST (4.22%) at its lowest level since the end of August. The USD (-0.13%) continued its November trend, weakening to late August levels, while the energy patch dragged down overall commodity markets which closed down 1% on the week.

Market Anecdotes

• Stocks and bonds wrapped up a terrific November last week with the Bloomberg Aggregate Index (+4.53%) posting its best month since 1985, bolstering what was a horrible year for bonds to a positive 1.66% return.
• Now that we are in the last month of 2023, a brief look at the positive seasonal equity market tailwinds serves up some hopeful holiday cheer that this year rhymes with history.
• Despite improving equity market breadth last week, a Goldman Sachs look at 2023 illustrates just how prolific the magnificent seven have been.
• Smaller companies, being more susceptible to higher interest rates, have seen both earnings and sales declines since the FOMC began raising rates.
• Broadly speaking, the softening labor market, coinciding with fiscal contraction and the lagged effect of higher interest rates informs our latter half 2024 cautious outlook for risk assets.
• Global central banks have officially become net rate cutters recently but the FOMC speaking circuit last week (@12) reiterated the November meeting narrative which was dovish on balance but delivered with a higher for longer expectation.
• Fed open market activities, now fully in QT mode, show the Fed as a clear net seller of treasuries and a Treasury department leaning heavily into the front end of the curve.
• Crude oil traded below $75 last week despite further output cuts from OPEC+ and another potential territorial dispute stemming from a Venezuela referendum regarding a disputed oil rich territory long ruled by Guyana.

Economic Release Highlights

• October headline (core) PCE inflation registered 3.0% (3.5%) YOY alongside MOM readings of 0% (0.2%), both generally in line with consensus forecasts. Personal Consumption and Personal Income were both in line with forecasts at 0.2% growth for the month.
• November ISM Manufacturing Index came in below the spot consensus forecast (46.7 vs 47.5) and toward the bottom end of the forecast range. The final PMI Manufacturing registered 49.4.
• The November Global Manufacturing PMI improved from 48.8 to 49.3.
• October New Home Sales of 679k came in short of the spot consensus (725k) but within the forecast range of 650k-750k. Pending Home Sales fell 1.5%, slightly less than the -2% forecast.
• The September Case-Shiller Home Price Index grew 0.7% MOM and 3.9% YOY, generally in line with the consensus forecast.
• Consumer Confidence Index for November registered 102.0, an improvement versus the prior month and
  slightly above the spot consensus forecast of 101.5.
• The second estimate of 3Q GDP reflected an upward revision from 4.9% to 5.2% but Personal Consumption was revised lower from 4.0% to 3.6%.

Weekly Market Report: November 24th, 2023

Markets last week, effectively a three-day workweek, were characterized by low volumes, a handful of economic reports, and hopefully a good dose of family, friends, and feasts. Global equity markets saw the S&P 500 up 1% and NASDAQ up 0.9%, both delivering a fourth consecutive week of gains. Emerging markets turned in a gain of 0.6% and we also saw a nice rally in developed internationals of 2.4%. Bond yields were relatively quiet with a small and parallel move slightly higher, closing with 10yr yields at 4.47%. Both the USD (-0.50%) and commodity markets (-0.40%) notched slight declines on the week.

Market Anecdotes

• 3Q earnings season is over, ending with a healthy earnings growth rate of 4.3% YOY totaling $487.1b in aggregate. The beat rate (LT average) 81.9% (66%), miss rate 13.7% (20%), and magnitude 7.3% (4.1%) all compared favorably relative to their respective long-term averages.
• Decent earnings, disinflation trends, peak FOMC rate cycle, easing financial conditions, and increased soft landing expectations have all contributed to one of the best Novembers for the S&P 500 on record thus far, currently up 8.8% with a few days remaining.
• For all the S&P headlines in 2023, non-U.S. markets including Japan (+15.8%), Germany (+17.2%), France (+16.4%), Emerging Europe (+27%), and Brazil (+23.7%) have impressed as well. Unfortunately, the same cannot be said for commonwealth countries and China (-6.3%).
• FOMC minutes released last week showed consensus on a cautious approach regarding additional rate hikes and an expectation that tight policy will continue to weigh on growth and inflation looking into 2024. Market rate cut expectations remain aggressive regardless.
• Interest rates have fallen from just under 5% (10yr) prior to the November FOMC meeting to under 4.5%, assisted by peak Fed, continued disinflation, and slowing growth narratives, the latter bolstered last week by slowing PMIs and durable goods orders reports.
• The resilient U.S. consumer has been a key growth driver over the past two years which begs a credit health check in addition to consumer ‘balance sheet’ narratives. A recent look at consumer loan delinquencies from Strategas does seem to square with a cautious view of 2024.
• The soft-landing narrative has been bolstered by the sample based estimates (2mo lag) of monthly payroll growth which has shown downward revisions every month this year with the exception of July – a sign of overstated 2023 strength following understated strength in 2021.
• The Biden-Xi summit went relatively well but, even more so than U.S. elections, Chinese geopolitical risk is centered around the January 13th Taiwan elections and whether a pro-mainland government will assume power.
• A Qatar negotiated temporary ceasefire in Gaza brought temporary reprieve to the war between Hamas and Israel with hostage and prisoner exchanges occurring over the weekend.

Economic Release Highlights

• U.S. PMI for November registered a composite reading of 50.7 with Manufacturing (49.4 vs 49.9) and Services (50.8 vs 50.5) both generally in line with their respective consensus forecasts.
• Eurozone PMI for November registered a composite reading of 47.1 with Manufacturing (43.8 vs 43.3) and Services (48.2 vs 48.0) both generally in line with their respective consensus forecasts.
• UK PMI for November registered a composite reading of 50.1 with Manufacturing (46.7 vs 45.0) and Services (50.5 vs 49.6) slightly better than the consensus forecasts.
• Existing Home Sales declined 4.1% MOM in October to 3.79M, down 14.6% YOY.
• Durable Goods Orders contracted 5.4% in October, below the low end of the (-4.4% – 2.8%) range and consensus spot forecast of 3.2%.
• U of M Consumer Sentiment Index for November was revised higher from 60.4 to 61.3 in the final release.

Weekly Market Report: November 17th, 2023

Markets last week rallied for a third consecutive week on the back of easing overall financial conditions thanks in large part to disinflation, soft landing, and peak Fed narratives. There was a fair amount of economic data, including October CPI, which leaned into the prevailing bad news is good news sentiment of late. Equity
markets were up sharply with U.S. (+2.24%), developed (+3.98%), and emerging (2.63%) all participating. Small cap U.S. stock jumped nearly 5.5% on the week. Bond markets saw the rally in Treasuries continue and the curve flatten, leaving the 10yr UST yield at 4.44%, down from 4.98% one month ago. The counter cyclical USD fell 1.84% while commodity markets were relatively flat thanks to a late week rally in oil which washed out losses from early in the week.

Market Anecdotes

•  A healthy easing of financial conditions since late October has contributed to stock markets rallying nearly 10% and bond yields falling nearly 0.50% – very healthy gains across the majority of financial market assets as we work through a (seasonally) favorable end to the year.
• Numerous economies including the U.S. are reporting slowing growth and disinflation trends. The most recent Atlanta Fed GDPNow model forecast for 4Q U.S. GDP is 2%.
• The soft CPI print washed out market expectations of any remaining FOMC rate hikes which are now pricing cuts of 25bps by June and 50bps by July. However, Bianco Research issued a reminder that the next two months present some difficult YoY base effect bogeys.
• Nineteen Fed speaking engagements last week noted favorable disinflation trends but also made clear it is far too early to declare victory – avoiding any hint of an all-clear signal for markets.
• A Preqin report on private credit highlighted the significant growth of the asset class to roughly $1.6t in AUM and nearly $500b of dry powder across various types of private credit strategies.
• The House and Senate passed a CR, avoiding a government shutdown, covering operations through late January to early February.
• An FT article last week highlighted net purchases by major central banks totaled nearly $20t from 2009 through 2022 with the exit from central bank QE programs a significant source of uncertainty looking out over the next several years.
• A weaker USD, which touched a 2 ½ month low last week, has been fueled by disinflation momentum implying a pull forward of Fed rate cut expectations.
• A report late last week that KSI may extend their voluntary cut and OPEC+ may cut an additional 1M bpd at this week’s meeting sparked a late week rally in crude oil prices.

Economic Release Highlights

• Headline and core CPI in October rose 3.2% and 4.1% with MOM readings 0% and 0.2% respectively, all registering 0.1% under their consensus forecasts.
• October Retail Sales declined 0.1%, slightly better than the expected -0.3% decline. Ex-Vehicles (0.1% vs – 0.1%) and Ex-Vehicles & Gas (0.1% vs 0.2%) were also generally in line with consensus.
• Weekly unemployment claims took the 4-week moving average to 220,250, a fifth consecutive weekly increase. Continuing Claims of 1.865mm are now at their highest in two years.
• October Industrial Production declined 0.63%, the largest monthly decline since December 2022 and below the long-term average reading of 0.26%.
• The NFIB Small Business Optimism Index in October registered 90.7, slightly above consensus 90.5 and within the forecast range.
• Housing Starts (1.372mm) and Permits (1.487mm) rose slightly in October versus the prior month reading.
• NAHB/Wells Fargo Housing Market Index fell a fourth consecutive month to 34.0.

Weekly Market Report: November 10th, 2023

In a rather uneventful week last week, equity markets added incrementally to the extraordinarily strong performance the week prior. The S&P 500 tacked on 1.3% thanks to strong performance from mega cap technology names which took year to date gains back to 15%. Other equity asset classes didn’t fare as well last week with small caps (-3.15%), developed international (-0.80%) and emerging markets (-0.29%) all in the red. The big bond market rally took a breather last week with some weakness in the belly of the curve (2y-5y). Commodity markets went the way of WTI oil last week, both down 3%-4% while the USD enjoyed a slight rebound, closing up 0.80% on the week.

Market Anecdotes

• Economic risks have decreased marginally thanks to the recent sharp decline in developed market bond yields which feeds both trade and risk appetite globally.
• Third quarter earnings season is drawing to a close, currently on pace for 4.1% earnings growth, with results coming in handily above expectations. Fourth quarter consensus is calling for 3.2% but 2024 estimates are currently at 6.7% for Q1 and 10.5% for Q2.
• Nineteen FOMC speaking engagements last week were punctuated by some hawkish comments from Jerome Powell who made it clear that policy may not yet be sufficiently restrictive and additional hikes are not off the table.
• An abnormally weak 30yr UST auction contributed to market anxiety later in the week as investors attempted to calibrate global treasury appetite in light of the increase in supply.
• A Bloomberg estimate of annualized interest payments on the US government debt climbed over the $1t mark in October.
• The NY Fed Consumer Credit report showed a sharp rise in delinquencies with credit card loans now above 8%, well up from the 4% low in Q4 2021.
• Fewer job openings, slower employment growth, and incrementally higher unemployment have economists growing more cautious and policy makers breathing and as restrictive policy may finally be taking effect.

Economic Release Highlights

• U of M Consumer Sentiment registered 60.4, well under consensus forecast of 63.7 and a notable decrease versus the prior month reading of 67.9. Longer-term inflation expectations increased to 3.2%.
• Following a softer than expected October jobs report (150k vs 180k), we’ve seen a slight uptick in weekly unemployment claims to the current 4-week average of 212,250.