Weekly Market Update – September 8, 2023

Quick Takes

• Global stocks and bonds closed lower over the holiday-shortened week amid concerns about additional interest rate hikes from the Federal Reserve, rising oil prices, a slowdown in China’s economy, and that China may be targeting U.S. technology companies in retaliation for U.S. export bans. 
• The U.S. dollar index reached its highest level since March and weighed on non-U.S. stocks and bonds. Developed market international stocks (as measured by the MSCI EAFE Index) fell -1.4% and the MSCI Emerging Markets Index was down -1.2%.

The yield on the 10-year U.S. Treasury note reached 4.30% at midweek before easing back to 4.26% by Friday’s close, and the 2-year U.S. Treasury yield briefly crossed back above the 5% on Thursday afternoon before settling just under the threshold at 4.99%.

Good news for the economy remains bad news for assets

The major global stock and bond indexes closed lower over the holiday-shortened week amid concerns about additional interest rate hikes from the Federal Reserve, rising oil prices, a slowdown in China’s economy, and that China may be targeting U.S. technology companies in retaliation for U.S. export bans. 

In the U.S., markets were closed Monday in observance of the Labor Day holiday. The benchmark S&P 500 Index finished the week down -1.3%, the tech-heavy Nasdaq Composite Index was down -1.9%, and the small cap Russell 2000 Index sank -3.6%. A drop in Apple drove part of the declines after news that Chinese government employees would no longer be able to use iPhones. Investors also may have been discouraged by reports that the upcoming iPhone 15 will be significantly more expensive than current models. Declines in NVIDIA and other chipmakers also weighed on the indexes. 

The U.S. dollar index reached its highest level since March when it peaked as the regional banking crisis was unfolding. The dollar’s surge has weighed on non-U.S. stocks and bonds as well as U.S. multinational firms with heavy overseas revenue. Developed market international stocks (as measured by the MSCI EAFE Index) fell -1.4% and the MSCI Emerging Markets Index was down -1.2%.

Energy stocks were among the market’s strongest performers over the week on expectations the recent rally in crude oil prices to 10-month highs will boost profits. Higher crude oil prices likely contributed to an inflation uptick last month. With the latest jump in oil prices, all eyes are now on next Wednesday’s Consumer Price Index (CPI) report for further clues on the Fed’s next policy move. The week’s economic calendar was relatively light but also seemed to reinforce the “good news is bad news” sentiment, with the majority of reports generally surprising on the upside. The standout appeared to be the Institute for Supply Management’s report on August services sector activity, which surged unexpectedly to its highest level since February. The report indicated that new orders were growing at a faster pace, although order backlogs fell sharply, and inventories had risen considerably.

In addition, weekly jobless claims came in lower than expected, hitting the lowest level since February and indicating continued strength in the labor market. The jobless numbers sparked a rise in bond yields, with the yield on the 10-year U.S. Treasury note reaching 4.30% at midweek before easing back to 4.26% by Friday’s close, and the 2-year U.S. Treasury yield briefly crossing back above the 5% on Thursday afternoon before settling just under the threshold at 4.99% for the week. The rising bond yields weigh down fixed-income benchmarks like the Bloomberg U.S. Aggregate Bond Index, which dipped -0.3% for the week, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) falling -1.3%.

On Wednesday, the Federal Reserve released its Beige Book, which is a collection of business anecdotes from the 12 Federal Reserve districts used by policymakers to prepare for their next monetary policy decision. The latest read, on balance, showed that outside of leisure travel, nonessential retail sales slowed. Auto sales rose due to better inventory and not because of consumer demand, the survey said. Job growth was subdued across the country, but wage growth remained elevated, although survey respondents in nearly all districts expect that to moderate in the coming months. The survey found that prices in consumer goods sectors fell faster than in many other sectors, while businesses are still facing high costs for inputs, putting pressure on profit margins. Overall, the comments in the Beige Book suggest that the economic acceleration seen in the spring and summer months may falter in the autumn.

Investors appear to be highly confident the Fed won’t hike rates in the near-term. At the end of the week investors were pricing in a 93% implied probability that the Fed will hold its benchmark funds rate at the current 5.25% to 5.50% target range at its September 19–20 policy meeting, according to the CME FedWatch Tool. Investors seem less certain on the rate outlook beyond this month. The market sees a 53.5% chance the Fed will hold rates steady following its October 31 to November 1 meeting, down from 64.6% a week ago, and 43.5% odds of a quarter-point increase.

Chart of the Week

Economic activity in the U.S. services sector activity expanded at the fastest pace in six months in August as consumer demand remained strong. The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) for service providers rose to 54.5 from 52.7 the prior month, beating expectations for 52.5, and marking the eighth straight reading above the 50% threshold that indicates expansion in the economy. Under the surface, the report was just as strong, with 13 of the 18 industries reporting growth. The New Orders index rose 2.5 percentage points to 57.5%, the Business Activity/Production index edged up to 57.3% from 57.1%, and the Employment index rose four percentage points to 54.7%. The Prices index rose 2.1 percentage points to 58.9% in the month–another sign that inflation may be reaccelerating. That will likely weigh on the Fed and the Treasury market, reinforcing the notion that rates need to stay higher for longer. 

In contrast to the ISM report, a separate PMI reading on the service sector from S&P Global Market Intelligence reported a near-stalling of service sector business activity in August, along with stubborn price pressures. Their survey of private sector services activity fell from 51.0 in July to 50.5 in August, remaining just a whisker above the 50.0 level to register the weakest expansion since February. A post-pandemic revival of travel, recreation, and hospitality spending contributed to improved economic performance in the spring and early summer but appears to be losing momentum as we enter the fall. S&P Global reports that companies are increasingly seeing customers becoming reticent to spend amid gloomier prospects as higher interest rates begin to take a toll. Average prices charged for goods and services rose in August at a rate broadly in line with what is commensurate with CPI inflation at 3%.

Stellar Services

Institute for Supply Management purchasing managers indexes

Note: Readings over 50 indicate activity is expanding, below 50 contracting.
Source: Institute for Supply Management, The Wall Street Journal.

Economic Review

• In July, Factory Orders fell -2.1% month-over-month, less than the -2.3% drop expected but sharply off June’s unrevised +2.3% increase. This was the first decline after four straight monthly gains. However, Ex-Transportation, there was a +0.8% increase in factory orders, an improvement on June’s +0.3% increase. Durable Goods Orders were down -5.2%, driven by a -43.6% decrease in orders for nondefense aircraft and parts. The main takeaway from this report is that, excluding transportation, orders appeared stronger in July.
• U.S. trade with the rest of the world rose +2% in July, resulting in the Trade Deficit widening to $65 billion, up from $63.7 billion the prior month (positively revised from $65.5 billion). That’s still below economists’ consensus expectations of $68 billion. Both Imports and Exports rose, with the former rising +1.7% to $316.7 billion, their third straight monthly increase, and the latter rising +1.6% to $251.7, their first gain after three consecutive months of decline. In a broader perspective, the Trade Deficit has seen a steady decrease, falling by -21.4% year-on-year. Despite a noticeable upturn month-over-month in both exports and imports, there’s an evident global economic slowdown, with Imports and Exports decreasing by -4.7% and -3.5% year-over-year, respectively.
• The Census Bureau reported Wholesale Trade for July, which saw Inventories slip while Sales jumped.  Inventories fell -0.2% to a seasonally adjusted $902.251 billion, a bit worse than expectations and the prior month’s drop, which were both -0.1%. Year-over-year inventories were up just +0.5%, the lowest level since January 2021. Sales jumped +0.8% to a seasonally adjusted $648.071 billion, completely reversing a -0.8% decline the prior month (revised down from -0.7%). It was the first monthly gain in sales after four straight declines and the largest increase in just over a year. Year-over-year sales were down -4.2%, the fifth straight annual decline. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio fell to 1.39 months in July from 1.41 months in the prior month. This is the lowest ratio since February. The ratio has been steadily increasing from a much lower 1.21 months in July 2021. The inventory-to-sales ratio is being watched closely because higher inventories could push companies to lower their prices, thereby cooling inflation. However, unwanted inventory may also signal a slowdown in the economy.
• U.S. Consumer Credit rose $10.4 billion in July, a material slowdown from the $14.0 billion gain in the prior month (itself a big downward revision from the initially reported $17.8 billion) and far under expectations for a $16.0 billion increase. Year-over-year, that’s a +2.5% annual rate, slower than the revised +3.4% rate in the prior month. Growth for revolving credit, such as credit cards, was up +9.2% to $1.271 trillion after a rare $0.8 billion decline the prior month, the first decline in revolving credit since April 2021. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, was up a modest +0.3% to $3.714 trillion, down from the prior month’s +4.8% growth. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt. Overall credit growth is decelerating, and the lower-than-expected growth in July was driven mostly by revolving credit for the second month in a row while nonrevolving credit growth remained suppressed.
• U.S. Household Net Worth jumped to a record in the second quarter as the value of real estate holdings and stocks rose. The continuing gains in equity prices were supplemented by the first increase in real estate equity in a year. Wealth rose $5.5 trillion to $154.3 trillion following a revised $3 trillion gain in the first quarter. Household Net Worth increased on a year-over-year basis for the first time in a year, rising +4.9% after dropping -2.4% in the first quarter. Housing wealth also rose for the first time in a year, and the components of wealth tied to the stock market rose for the third straight quarter. Household liabilities rose modestly as business debt outstanding, as well as consumer credit not including mortgages, each grew at the slowest pace since the end of 2020 in the second quarter. Meanwhile, mortgage debt picked up.
• Weekly MBA Mortgage Applications fell -2.9% for the week ended September 1, following the prior week’s +2.3% rise, which was the index’s first gain in six weeks. The Purchase Index fell -2.1% following a +2.0% rise the prior week, and the Refinance Index dropped -4.7% following a +2.5% jump the prior week. The average 30-Year Mortgage Rate declined to 7.21%, the first drop in six weeks after rising to the highest level since December 2000, but remains 1.27 percentage points higher from a year earlier.
• Weekly Initial Jobless Claims fell -13,000 to 216,000 for the week ended September 1, below expectations for 233,000 and last week’s 229,000 — revised up from the initially reported 228,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +40,000 to 1,679,000 in the week ended August 26, below consensus for 1,719,000, and down from last week’s reading of 1,719,000 (revised down from 1,725,000).

The Week Ahead

After the light holiday-shortened week, the economic calendar gets busier this week. Inflation data will be front and center, including the Labor Department’s Consumer Price Index CPI for August out Wednesday, followed a day later by the Producer Price Index (PPI), and then Import Prices as well as Consumer Inflation Expectations from the University of Michigan monthly survey on Friday. All the reports will be heavily scrutinized for clues on the Federal Reserve’s next moves. Besides U.S. inflation and the Fed, investors will be watching as the European Central Bank (ECB) holds a policy meeting and press conference on Thursday morning. The ECB has raised rates at nine straight meetings, but many analysts expect them to pause at this one.

Did You Know?

HEALTH COSTS CLIMB – Health insurance costs are climbing at the steepest rate in years, drubbing businesses and their workers. Costs for employer medical coverage are expected to surge around +6.5% for 2024, according to benefits consulting firms Mercer and Willis Towers Watson. Among the factors leading to the faster health insurance cost growth are hospitals’ higher labor costs and heavy demand for new and expensive diabetes and obesity drugs (Source: Mercer and Willis Towers Watson, The Wall Street Journal).

SITTING TIGHT – A lack of U.S. homes for sale has pushed up home prices to the highest level since October, according to real estate brokerage Redfin, as homeowners don’t want to give up their relatively low mortgage rates. The inventory shortage is causing competition for desirable homes, with the median home-sale price climbing +5% year-over-year (YoY) to $380,000 during the four weeks that ended August 27 (Source: Redfin, Seeking Alpha).

PLACE YOUR BETS – An annual survey released by the American Gaming Association forecast a major increase in the number of people making bets during the 2023 NFL season, with 73.5M U.S. adults placing wagers this fall and winter vs. 27M adults in 2022 (Source: American Gaming Association, Seeking Alpha).

This Week in History

LABOR DAY LAUNCH – On September 3, 1894, Labor Day was celebrated for the first time. Before it became a federal holiday, Peter J. McGuire, a union leader, suggested that there be a day to celebrate American workers, roughly between Independence Day and Thanksgiving. Labor activists and others in support paraded in New York City, and the day slowly gained traction throughout the states. In 1894, the same year as the Pullman Strike and May Day riots, President Grover Cleveland suggested a bill that was made into law, and thus, Labor Day was made official. Hope you enjoyed the long weekend! (Source: Bespoke Investment Group).

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.