Weekly Market Update – August 25, 2023

Quick Takes

• The S&P 500 and Nasdaq Composite enjoyed their first weekly gains in August, rising +0.8% and +2.3%, respectively, but the small cap Russell 2000 suffered its fourth straight weekly decline, slipping -0.3%.
• The 2-year U.S. Treasury yield was up +14 basis points (bps) at 5.08%, its highest close since June 2008. The 10-year U.S. Treasury yield dipped -2 bps to 4.24%, breaking 5 weeks of increases, as did the 30-year U.S. Treasury yield, which fell -9 bps to 4.28%.
• Federal Reserve Chairman Jerome Powell, speaking at the Kansas City Fed’s annual Jackson Hole Symposium, left the door open to further rate increases, saying the central bank would “proceed carefully” as it considers the next steps in its battle against inflation.

U.S. stocks and bonds get their first weekly win of August

The S&P 500 and Nasdaq Composite enjoyed their first weekly gains in August, rising +0.8% and +2.3%, respectively, to overcome negative sentiment around consumer spending and retailers earlier in the week. Small companies weren’t as fortunate, with the Russell 2000 suffering its fourth straight weekly decline, slipping -0.3%. Markets were mixed overseas as well, with developed market international stocks (as measured by the MSCI EAFE Index) dipping -0.2% while the MSCI Emerging Markets Index rebounded +0.7% for its first positive week in August.

Markets rallied on Friday to preserve the weekly win after falling sharply Thursday after a rally in technology stocks, sparked by stronger-than-expected earnings by Nvidia, was short-lived. Investors were bracing for the Friday morning speech by Federal Reserve Chairman Jerome Powell. Powell, speaking at the Kansas City Fed’s annual Jackson Hole Symposium, left the door open to further rate increases, saying the central bank would “proceed carefully” as it considers the next steps in its battle against inflation. But although Powell had some hawkish comments, his overall remarks were viewed as middle-of-the-road. He stressed that the Fed is still watching economic data points closely and won’t deviate from its mission to bring inflation back to a 2% target. “Two percent is and will remain our inflation target,” he said, refuting some viewpoints from economists who have questioned increasing the inflation target to the 3 – 4% range. Late Friday, the market was pricing in a roughly 81% probability that the Federal Open Market Committee will hold rates unchanged following its September 19–20 meeting. According to CME FedWatch Tool, the probability that the Fed rate is a quarter-point higher than current levels after the November meeting moved up to 48.3% from 42.2% on Thursday. Odds that it is a half-point higher after the meeting rose to 9.2% from 7.1%. Economic data in the coming week could change that with the August Employment Report due on Friday as well as the Fed’s preferred inflation measure, the Core Personal-Consumption Expenditures (PCE) Price Index. That is forecast to be up +4.2% from a year earlier, still well above the Fed’s 2% long-term target. 

Treasuries had been under heavy selling pressure all month but, like stocks, enjoyed a reprieve for the week. Short-term rates pushed higher on the week while the benchmark 10-year yield remained a bit down. The yield on the 2-year U.S. Treasury note closed the week up +14 basis points (bps) at 5.08%, its third straight week of increases and highest close since June 2008. The yield on 10-year U.S. Treasury note dipped -2 bps to 4.24%, breaking five straight weeks of increases, as did the 30-year U.S. Treasury yield, which fell -9 bps to 4.28%. Bond prices move inversely to yields, so the major bond indices continue to fall. The Bloomberg U.S. Aggregate Bond Index gained +0.3% for the week, its first positive week since July 21. Non-U.S. bonds were down with the Bloomberg Global Aggregate ex U.S. Bond Index falling -0.4%, their sixth consecutive weekly loss.

Chart of the Week

The highest mortgage rates in a generation should be squashing the home building sector. Instead, they are actually helping it… for now. Housing data during the week showed that new home sales in July came in at an annual rate of 714,00, up from 684,000 in June and 543,000 in July last year. By contrast, existing home sales fell in July for the fourth time in five months. One reason new-home sales have rebounded: most current homeowners are locked into lower rates and are therefore, hesitant to move. This is weighing heavily on the supply of previously owned homes for sale. Just 980,000 existing single-family homes were for sale last month, the fewest during the month of July in records stretching back to 1982. The low supply means elevated prices for existing homes and increased demand for new homes. There will be some level of mortgage rates which, if it is hit, will challenge new-home sales, but so far, the economy and housing market have weathered the higher rates. Further details from the New Home and Existing Home Sales reports can be found in the Economic Review section below.

How High a Rate Can Housing Take?

New single-family home sales, by stage of construction

Note: Seasonally adjusted annual rate.
Source: Commerce Department, The Wall Street Journal.

Economic Review

• The final reading of the University of Michigan Consumer Sentiment Index retreated to 69.5 in August after hitting a 22-month high of 71.6 in July, coming in below expectations to stay at the preliminary reading of 71.2. It is the first month-over-month decline since May. In the same period a year ago, the index was at 58.2. The Current Economic Conditions component declined to 75.7 from 76.6 the prior month. The Consumer Expectations component slipped to 65.5 from 68.3. One-year inflation expectations edged up to +3.5% from +3.4% the prior month. The five-year inflation expectations came in at 3.0% for the third consecutive month and have hovered in a range from 2.9-3.1% in 24 of the past 25 months.
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) fell for the fourth month in a row, down to 50.4 in August from 52.0 the prior month. That marks the lowest level in six months. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI remains in contraction, falling to 47.0 from 49.0 the prior month, which was also where expectations were. The Services PMI slipped to six-month low of 51.0 from 52.3 the prior month, below expectations for 52.2. Most Americans are employed on the service side of the economy in areas such as technology, healthcare, finance, and hospitality.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment unexpectedly fell -5.2% in July, the biggest slump since April 2020 and breaking a streak of four increases. This followed a downwardly revised +4.4% rise in June (from +4.6%) and was below expectations for -4.0%. Once again, the transportation sector drove the story, with transportation orders plummeting -14.3% after increasing +12.5% in June. The transportation segment is a large and volatile category that can exaggerate the ups and downs in industrial production. Boeing orders often seesaw in the summer months, and a spike in new contracts for Boeing passenger planes drove the surge in June and then, once complete, was the primary reason for the drop in July. Durable Goods Orders Excluding Transportation actually increased a +0.5% in July, beating expectations of +0.2% and June’s +0.2% (revised down from the originally reported +0.5%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.1% following a -0.4% fall in June (revised down from +0.1%).
• The Commerce Department reported New Home Sales rose +4.4% in July to a seasonally adjusted annual rate of 714,000 units, above expectations for 701,000 units and the prior month’s 684,000 units (a big negative revision from the originally reported 697,000). That was the fastest pace since February 2022. After trailing the prior month with a -28.4% plunge, the Midwest led the nation in July with a +47.4% surge. Sales varied widely among the four major regions, led by the Northeast with +20.6% growth for the month, while the Midwest trailed with a -28.4% plunge. The West also saw strong sales with a +21.5% rise, but new home sales fell in the Northeast and the South. Year-over-year, new home sales were up +31.5%. The Median New Home Price rose to $436,700 from $415,400 the prior month. The inventory of new homes for sale fell -2.7%, which represents 8 months of supply at the current rate of sales, down from 7.5 months the prior month and 10.1 months a year ago. 
• The National Association of Realtors (NAR) reported that Existing Home Sales fell again in July as inventories fell near quarter-century lows. Existing home sales make up most of the housing market but fell -2.2% in July to a seasonally adjusted annual rate of 4.07 million, shy of expectations for 4.15 million and the prior month’s unrevised 4.16 million. That was the slowest sales pace since January, as well as the slowest rate of homes sold for the month of July since 2010, in the wake of the Great Recession. The West rebounded with a +2.7% gain in the month, but the other regions were all down. Sales dropped the most in the Northeast, down -5.9%. On a year-over-year basis, compared with July 2022, home sales were down -16.6%. The Median Existing Home Price declined for the first time after five consecutive months higher, dropping to $406,700 from $410,200 the prior month, but up +1.9% from a year ago. Homes for sale rose to 1.11 million units from June’s record low of 960,000 units, but that is still the smallest total inventory for any July in data back to 1999. Homes listed for sale remained on the market for 20 days on average, up from 18 days in July. Last July, homes were only on the market for 14 days.
• The Chicago Fed National Activity Index (CFNAI) showed a pickup in economic activity in July, rising to +0.12 from -0.33 in June (revised down from -0.32), which was well below expectations for -0.13%. Readings below zero indicate below-trend growth in the national economic activity. Two of the four broad categories of indicators used to construct the index increased, led by the Production and Income index component, which contributed +0.18 to CFNAI from -0.36 the prior month. Overall, breadth was positive, with only 45 of the 85 monthly individual indicators making positive contributions, while 40 indicators affected the index negatively.
• The Richmond Fed Manufacturing index slipped -7 from an unrevised -9 the prior month but above expectations for -10. August was the eighth consecutive negative reading, though still above a level of -20, which is typically associated with previous recessions. Two of its three component indexes — shipments and new orders — increased. The shipments index edged up from −6 in July to −5 in August, while the new orders index rose from −20 to −11. However, the third component index — the employment index — fell from 5 in July to −3 in August.
• The Kansas City Fed Manufacturing Survey showed factory activity was flat for the Federal Reserve’s Tenth District in August, with the index falling to 0 from -11 in July, far better than expectations for a -10 reading. The production, shipments, and new orders indexes all improved nicely. Employment dipped to +1 from +4 the prior month. Price pressures reaccelerated with the prices paid index jumping 20 points to +13 in August.
• The weekly MBA Mortgage Application Index fell -4.2% for the week ended August 18, following the prior week’s -0.8% drop and marking the lowest level since 1995. The Purchase Index fell -2.0% following a -0.3% drop the prior week, and the Refinance Index fell -2.8% following a -1.9% drop the prior week. The average 30-year Mortgage Rate rose for the third straight week, up +15 basis points to 7.31%, the highest since December 2000 and 1.66% percentage points higher from a year earlier.
• Weekly Initial Jobless Claims fell +10,000 to 230,000 for the week ended August 19, below expectations for 240,000, and last week’s positively revised 240,000 reading — up from the initially reported 239,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +9,000 to 1,702,000 in the week ended August 12, below consensus for 1,705,000, and up from last week’s reading of 1,711,00, revised down from 1,7161,00.

The Week Ahead

The busiest week of economic data in some time will be headlined by new data on the U.S. labor market, including the July Job Openings and Labor Turnover Survey (JOLTS) on Tuesday and the August Employment Report on Friday. Economists are forecasting job openings to hold steady from last month, and on Friday, the forecast is for a gain of 175,000 nonfarm payrolls—which would be another deceleration—and the unemployment rate is expected to remain at 3.5%. Other economic data out next week will include the Conference Board’s Consumer Confidence for August and the Bureau of Economic Analysis’ Personal Income and Expenditures data for July. The Federal Reserve’s preferred inflation measure, the Core Personal-Consumption Expenditures (PCE) Price Index, is forecast to be up +4.2% from a year earlier. Housing data is also on the docket with the competing FHFA and S&P CoreLogic House Price Indexes. Just a few earnings reports remain for the second quarter earnings season. Best Buy, Hewlett Packard Enterprise, Salesforce, Broadcom, Dollar General, and Campbell Soup release results.

Did You Know?

SHRINKAGE – U.S. homes are shrinking as homebuyers are faced with high mortgage rates. Since 2018, the average unit size for new housing starts has decreased -10% nationally to 2,420 square feet, according to listing platform Livabl by Zonda. Most builders and architects are now into more efficient living spaces, increasing the size of multi use areas like kitchens and great rooms and promoting shared spaces such as jack-and-jill bathrooms (Source: The Wall Street Journal).

CHEAP BEER – Beer giant Heineken sold its Russia operations, which include seven breweries with 1,800 employees, to a Russian packaging and cosmetics company for the symbolic sum of $1. The deal came shortly after Moscow seized the local assets of Danish beer rival Carlsberg. Moscow now allows the state to take temporary control of the assets of businesses or individuals from what it calls “unfriendly” states. Last month, Russia seized the local operations of French food company Danone (Source: The Wall Street Journal).

LUNAR SOUTH POLE – India has become the first country to reach the moon’s south pole. The Chandrayaan-3 spacecraft accomplishment came just days after a similar Russian mission failed. Scientists and engineers hope to tap water resources in that area to facilitate missions to other parts of the solar system and human settlements on the moon (Source: The Wall Street Journal).

This Week in History

PSL TURNS 20 – Twenty years ago pumpkin spice and autumn hadn’t really found each other yet. But in the fall of 2003, Starbucks launched the Pumpkin Spice Latte as a new beverage in a test to about 100 stores in Washington, D.C. and Vancouver, Canada. They knew they had a hit in the first week of the test, and the next fall, the Pumpkin Spice Latte (fondly known as PSL) rolled out across the U.S. and Canada. Over the past two decades, the perennial favorite has become a reliable hit, giving the coffee chain a seasonal sales boost during this time of year (Source: CNN, Starbucks).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.