Last Week in Review – December 4, 2023 – from Stephen Colavito

The major indexes ended higher last week, with the S&P 500 Index and Nasdaq Composite rounding out their best monthly gains (8.9% and 10.7%, respectively) since July 2020 on Thursday. Falling Treasury yields seemed to continue to boost sentiment, and a broad bond market index recorded its best monthly gain since 1985.

Last week brought some good news on the inflation front. On Thursday, the Commerce Department reported that the Federal Reserve’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index, rose 0.2% in October, a slowdown from September. This brought its year-over-year increase down to 3.5%—still well above the Fed’s 2% target but the lowest level since April 2021. Over the past six months, core PCE was running even slower, at an annualized rate of 2.5%.

Even before the release of the data, a noted Fed hawk, Board Member Christopher Waller, surprised investors on Tuesday by telling a Washington conference that “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.” While cautioning that work remained, he also acknowledged that “we have seen the most rapid decline in inflation on record.”

According to Reuters, Waller also told the audience that if inflation continued to moderate over the next three to five months, “we could start lowering the policy rate just because inflation is lower," stressing that "it has nothing to do with trying to save the economy. It is consistent with every policy rule. There is no reason to say we will keep it really high."

A slight change in tone from Fed Chair Jerome Powell may have helped both stocks and bonds end the week on a solid note. In a speech on Friday, Powell acknowledged that interest rates were now “well into restrictive territory.” He also warned that the Fed would raise rates again if dictated by the data.

US - MARKETS & ECONOMY

The week arguably offered some evidence that the economy may be headed toward policymakers’ goal of a “soft landing.” Personal spending rose 0.2% in September, its smallest increase in six months, while personal incomes rose at the same pace. Housing permits came in above expectations, but actual starts surprised on the downside. Weekly jobless claims ticked down, but continuing claims jumped more than expected to 1.93 million, their highest level since November 2021.

Hopes that the economy is running neither too hot nor too cold—the so-called “Goldilocks” scenario—may have been boosted by the release on Thursday of the Fed’s Beige Book. The central bank’s periodic survey of economic activity in its 12 separate districts was split down the middle, with half reporting growth and half contraction.

US – EQUITY MARKET PERFORMANCE

US YIELDS & BONDS

Powell’s comments helped push the yield on the benchmark 10-year Treasury note down to nearly a three-month low of 4.21% in intraday trading on Friday. (Bond prices and yields move in opposite directions.) According to traders, tax-exempt municipal bonds got an additional lift from constructive technical conditions through healthy demand and manageable new supply.

Issuance was in line with weekly expectations in the investment-grade corporate bond market. All issues were oversubscribed. The continued rate rally and expectations that liquidity will become more challenging in mid-to-late December supported the performance of high-yield bonds last week.

US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE

3 Mth 0.00 bps to 5.39%
2-yr: -0.12 bps to 4.95%
5-yr: -0.20 bps to 4.49%
10-yr: -0.19 bps to 4.47%
30-yr: -0.16 bps to 4.60%

INTERESTING NEWS OVERSEAS

In local currency terms, the pan-European STOXX Europe 600 Index ended 1.35% higher, as a steep decline in inflation and falling bond yields lifted investor sentiment. Major stock indexes rose as well. Germany’s DAX climbed 2.30%, Italy’s FTSE MIB tacked on 1.69%, and France’s CAC 40 Index added 0.73%. The UK’s FTSE 100 Index gained 0.55%.

European government bond yields broadly declined as lower-than-expected inflation data raised expectations that the European Central Bank (ECB) could start cutting interest rates next year. In Germany, the benchmark 10-year government bond yield fell toward its lowest level in more than four months. The yield on the benchmark 10-year Italian bond declined toward 4%. In the UK, bond yields bucked the broader trend, rising from midweek lows on hawkish comments from policymakers.

Eurozone annual consumer price growth in November slowed more than expected in November to 2.4%, down from 2.9% in October and below expectations for 2.7% in a FactSet poll of economists. Underlying price pressures also eased. Core inflation, which excludes food and energy costs, dropped to 3.6% from 4.2%. Separately, the jobless rate held steady at a record low of 6.5%.

Before inflation data were released, several policymakers reiterated their hawkish view that rates would have to stay higher to contain inflation. ECB President Christine Lagarde told a committee of the European Parliament that solid wage growth and an uncertain outlook meant that “this was not the time to start declaring victory” in the fight to curb inflation. Germany’s Bundesbank President Joachim Nagel and Spain’s Pablo Hernandez de Cos reiterated that it was too early to discuss rate cuts.

Japan’s stock markets fell last week, with the Nikkei 225 Index declining 0.6% and the broader TOPIX Index down 0.4%. Japanese shares were subject to some profit-taking after rallying in November on expectations that U.S. interest rates had peaked, while a solid corporate earnings season and weakness in the yen had also provided a favorable backdrop.

Last week, the 10-year Japanese government bond yield fell to 0.71% from 0.77%, tracking recent weakness in U.S. bond yields on dovish remarks from Federal Reserve policymakers amid signs of slowing economic activity.

The yen strengthened to the high-147 range against the U.S. dollar from the prior week’s mid-149 range. This was in an environment of general weakness in the greenback, as anticipation grew that the Fed could start cutting rates next year.

Lastly, Chinese equities retreated as official indicators underscored concerns about the country’s fragile recovery. The Shanghai Composite Index gave up 0.31%, while the blue-chip CSI 300 lost 1.56%. According to FactSet, the Hang Seng Index fell 4.15% in Hong Kong.

Economic data for October provided a mixed snapshot of China’s economy. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction. The non-manufacturing PMI slipped to a lower-than-expected 50.2 from 50.6 in October. Readings above 50 indicate growth from the previous month. On the other hand, the private Caixin/S&P Global survey of manufacturing activity rose to an above-forecast 50.7 in November from October’s 49.5, as new order growth rose to the highest level since June.

THE WEEK AHEAD