Last Week in Review – August 28, 2023 – from Stephen Colavito
Benchmark returns varied last week as investors reacted to mixed economic and monetary policy signals. Growth stocks handily outperformed value shares, helped by another substantial earnings and revenue beat by artificial intelligence chipmaker NVIDIA. Financials pulled back early in the week after S&P Global downgraded its credit ratings of five regional banks, citing, in part, stresses in the commercial real estate lending market.
Several retailers reported second-quarter results, arguably offering a generally cautious picture of the health of the U.S. consumer. Shares of department store operator Macy’s fell sharply after the company reported falling earnings and warned of growing consumer caution and rising credit card delinquencies. While beating earnings and revenue estimates, Macy's competitor Nordstrom also cited increasing late credit card payments in a cautious outlook. Nordstrom, discount chain Dollar Tree, and specialty retailer Dick’s Sporting Goods noted that earnings suffered from exceptionally high levels of theft from their stores.
US - MARKETS & ECONOMY
The University of Michigan’s final reading of August’s consumer sentiment, released Friday, fell a bit from July’s nearly two-year high, seemingly due to higher inflation expectations following the recent increase in gas prices. However, the study’s chief researcher noted that “consumers remain supported by strong income expectations,” with hopes for higher wages most robust among lower-income consumers. The continued health of the labor market appeared to be confirmed by the weekly jobless claims report, which came in at 320,000, the lowest level in three weeks.
Durable goods orders data released Thursday indicated a somewhat higher degree of business caution, at least in certain areas. While durable goods orders, excluding defense and transportation—commonly accepted as a proxy for business investment—rose 0.1% in July, this was more than offset by a downwardly revised 0.4% contraction in June. S&P Global’s index of manufacturing activity also fell more than expected in August, reversing most of July’s substantial gain and moving further back into contraction territory.
The housing sector appeared more robust, with new home sales reaching their highest level in July since early 2022, despite the highest mortgage rates in years. Freddie Mac reported on Thursday that the 30-year fixed rate mortgage had reached its highest level since 2001. Existing home sales fell back and missed expectations, however.
On Friday, Federal Reserve Chair Jerome Powell gave some indication of how he was interpreting these mixed signals in his speech before the central bank’s annual symposium in Jackson Hole, Wyoming. Powell acknowledged that higher rates had slowed industrial production and wage growth while tightening bank lending standards were also cooling the economy. On the other hand, he noted that economic growth remained above its longer-term trend and that the housing sector appeared to be “picking back up” after slowing sharply over the past year and a half. “As is often the case,” he concluded, “we are navigating by the stars under cloudy skies.”
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
The same could be said of bond investors in the wake of his speech, with stock benchmarks and bond yields fluctuating considerably to the end of the week. After hitting its highest intraday level (4.36%) since late 2007 on Tuesday, the yield on the benchmark 10-year U.S. Treasury note fell back to end relatively unchanged for the week at 4.24%. The ratio of tax-free to Treasury increased over much of the week—indicating underperformance of munis relative to Treasuries—with the 10- and 30-year ratios moving to the highest levels seen in months.
Issuance was light throughout the week in the investment-grade corporate bond market ahead of Powell’s speech, but the three issues that came to market were oversubscribed. Similarly, our high yield and bank loan markets appeared on hold before the Jackson Hole conference.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth +0.03 bps to 5.46%
2-yr: +0.14 bps to 5.08%
5-yr: +0.05 bps to 4.44%
10-yr: -0.18 bps to 4.24%
30-yr: -0.10 bps to 4.28%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.66% higher as European natural gas prices dropped and expectations grew that interest rates may soon peak. Major stock indexes advanced. Italy’s FTSE MIB tacked on 1.61%, France’s CAC 40 Index gained 0.91%, and Germany’s DAX added 0.37%. The UK’s FTSE 100 Index rallied 1.05%.
Eurozone bond yields fell, with 10-year German sovereign yields ending lower. Economic data pointed to a weakening European economy, prompting financial markets to pare expectations on future interest rate increases.
Initial results from a survey of purchasing managers compiled by S&P Global indicated that business activity in the eurozone likely shrank for a third consecutive month. The Purchasing Managers’ Index (PMI) for manufacturing came in at 43.7—a slight improvement from July but still well below 50, indicating a contraction in activity. Meanwhile, the PMI reading for the services sector dipped below 50. The HCOB Flash Eurozone Composite PMI Output Index, which combines data from both sectors, fell to a 33-month low of 47.0 from 48.6 in July.
Japanese equities rallied following the previous week’s declines, posting four consecutive positive sessions, before giving up much of the gains in a disappointing Friday close. The benchmark Nikkei 225 finished the week 0.6% higher and the broader TOPIX up 1.3%.
Japanese investors appeared undeterred by a softer-than-hoped-for policy response from China in the face of slowing growth and a building property crunch. Markets were further buoyed by encouraging domestic data announcements. Flash composite PMI data, combining manufacturing and services sector activity, rose to 52.6 in August, up from 52.2 in July. And while Japan's factory activity shrank for a third consecutive month in August, data showed the pace of decline was slowing.
Various inflation readings during the week provided mixed messages. However, a 3.1% rise in Japan's core consumer prices in July was generally well received.
Lastly, Chinese stocks fell as investors grew more pessimistic about the country’s economic outlook. The blue-chip CSI 300 Index and Shanghai Composite Index recorded weekly declines, adding to their year-to-date losses. The CSI 300 Index is trading at its lowest level since November 2022, while the Shanghai Composite Index is at its lowest level since last December. In Hong Kong, the Hang Seng Index, which entered a bear market the previous Friday, rose slightly for the week, though it too is at its lowest level since November.
Disappointing data, signs of deflation, record youth unemployment, and continued liquidity problems in the debt-laden property sector have contributed to an erosion of confidence in China’s economy. Signs of deteriorating growth—and a sense that China’s government has relatively few good options to arrest the downturn—have raised the prospect of accelerated capital outflows. Overseas funds sold the equivalent of USD 10.7 billion from the mainland market over the 13 trading days through Wednesday, according to Bloomberg, the longest stretch since it began tracking the data in 2016.
THE WEEK AHEAD
The US economy is projected to have added around 170,000 jobs in August, marking the lowest addition since a loss of 268,000 jobs in December 2020. Meanwhile, the unemployment rate is expected to remain steady at 3.5%. The Core PCE prices, the Federal Reserve's preferred measure of inflation, are anticipated to increase by 0.2% month over month in July, mirroring the rise seen in June. Concurrently, personal income is predicted to grow by 0.3%, and personal spending is expected to see a 0.6% increase. Several other significant releases to monitor include JOLTs job openings, the ISM Manufacturing PMI, the second estimate of Q2 GDP, Case-Shiller home price data, pending home sales figures, and the CB Consumer Confidence Index. Additionally, attention will be on the advance estimates of the goods trade balance and wholesale inventories. Regional industry indicators such as the Dallas Fed Manufacturing Index and the Chicago PMI will also contribute to the broader economic picture.
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
This message is informational and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. San Blas Advisory is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, available upon request.