Last Week in Review – July 24, 2023 – from Stephen Colavito
Last week, the major U.S. equity indexes advanced on hopes that the tight labor market and moderating inflation would help the economy avoid a hard landing. The tech-heavy Nasdaq Composite, however, suffered a modest pullback. Value stocks outperformed their growth counterparts in the large-cap Russell 1000 Index.
US - MARKETS & ECONOMY
In economic news, retail sales ticked up 0.2% sequentially in June, a slower pace than the 0.6% consensus estimate reported by FactSet. Upward revisions to the May data raised the growth rate for that month to 0.5% from the initial reading of 0.3%.
New filings for unemployment benefits fell for a second consecutive week and by more than economists had expected, with initial claims reaching their lowest level since May.
U.S. Treasury Secretary Janet Yellen told Bloomberg TV she does not expect the U.S. to lapse into recession, citing the labor market’s resilience and slowing inflation.
Meanwhile, the Conference Board’s Leading Economic Index, a forward-looking gauge of U.S. economic activity, decreased for a 15th consecutive month in June—the longest string of sequential declines since 2007–2008. The decrease appeared to stem from weakness in consumer sentiment, new orders, and a slowdown in housing construction.
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
Two-year U.S. Treasury note yields increased during the week. However, the yield on the benchmark 10-year U.S. Treasury note was little changed, leading to a further inversion of the yield curve as investors appeared to price in a near certainty of another Federal Reserve rate hike at the central bank’s July 25–26 policy meeting. The tax-exempt municipal bond market continued to see positive momentum as reinvestments from coupon payments and bond maturities bolstered demand for municipal bonds. Traders we spoke to noted that new deals saw strong levels of oversubscription.
The investment-grade corporate bond market saw new issuance throughout the week and was largely oversubscribed, led by highly anticipated issues from six large banks. An improved macro backdrop was supportive of high-yield bonds.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth +0.05 bps to 5.40%
2-yr: +0.07 bps to 4.84%
5-yr: +0.04 bps to 4.09%
10-yr: 0.00 bps to 3.83%
30-yr: -0.03 bps to 3.90%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.95% higher on hopes that evidence of slowing inflation eventually could herald the end of monetary policy tightening. Most major Continental stock indexes rose modestly. Italy’s FTSE MIB advanced 0.67%, France’s CAC 40 Index gained 0.79%, and Germany’s DAX added 0.45%. The UK’s FTSE 100 Index climbed 3.08%, helped, in part, by the British pound depreciating relative to the U.S. dollar. The index includes many multinational companies with overseas revenues.
European government bond yields broadly ticked lower as cooling inflation in the U.S. and the UK raised expectations that major central banks could be close to the end of tightening monetary policy. Italy’s 10-year sovereign bonds' yield dropped below a one-month low of 4%. In the UK, yields on 10-year government bonds declined on the reassuring inflation figures.
UK annual consumer price growth slowed to 7.9% in June from 8.7% in May due to a decline in gasoline prices. The magnitude of the slowdown in inflation exceeded a consensus estimate and matched the Bank of England’s (BoE) forecast. BoE Deputy Governor David Ramsden said: "CPI inflation has begun to fall significantly but remains much too high.” The Monetary Policy Committee “has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling,” he noted.
Japan’s stock markets registered mixed performance for the week, with the Nikkei 225 Index falling 0.3% and the broader TOPIX Index gaining 1.0%. The sentiment was primarily driven by investor caution ahead of the Bank of Japan’s (BoJ’s) July 27–28 monetary policy meeting and a slight dampening in expectations that the central bank would tweak its yield curve control (YCC) framework. However, in line with consensus expectations, a hot June core consumer price inflation print exerted some pressure on the BoJ to tighten policy and raise its inflation forecasts.
Against this backdrop, the 10-year Japanese government bond yield rose slightly to 0.48% from 0.47% at the end of the previous week. The yen weakened to around JPY 141.82 against the U.S. dollar from about JPY 138.76 the prior week.
The Cabinet Office’s midyear economic forecast updates showed that Japan’s government revised its forecast for economic growth in the fiscal year from April 1 to 1.3% from 1.5%. It raised its total consumer price inflation forecast for the 2023 fiscal year to 2.6% from a previously forecast 1.7%. Many observers expect the BoJ to follow suit and raise its inflation forecasts at its July monetary policy meeting.
Inflation remains well above the BoJ’s 2% target—in June, Japan’s core consumer price index rose 3.3% year on year, in line with expectations and a slight uptick from the prior month’s 3.2% increase.
Lastly, Chinese equities retreated as the latest economic data pointed to faltering growth. The Shanghai Stock Exchange Composite Index tumbled 2.16% in local currency terms, while the blue-chip CSI 300 declined 1.98%. In Hong Kong, the benchmark Hang Seng Index fell 1.74%.
On a year-over-year basis, China’s gross domestic product expanded 6.3% in the second quarter—below expectations but faster than the 4.5% growth rate recorded in the first quarter. On a quarterly basis, the economy grew 0.8%, down from the first quarter’s 2.2% expansion. Quarterly readings provide a better reflection of underlying growth in China than comparisons from a year ago when Shanghai and other cities were under pandemic lockdown. Unemployment remained steady at 5.2% in June, but youth unemployment jumped to 21.3%.
According to a statement released Wednesday, the government pledged to improve conditions for private businesses to boost corporate confidence amid the faltering recovery. Separately, Chinese authorities unveiled an 11-point consumption plan to increase household spending.
THE WEEK AHEAD
In the US, the Fed is expected to raise Fed Funds by 25bps on Wednesday, which many investors believe will be the final one of the current tightening cycle. This is due to the sharp cooling of inflationary pressures and signs of loosening in the labor market. On the economic data front, the GDP in the US is expected to grow by 1.6% in Q2, marking the weakest pace of expansion since the recession recorded in the first half of 2022. Other economic releases to follow include June's personal outlays and income, PCE price index, durable goods orders, flash S&P Global PMI survey, Case-Shiller home prices, second-quarter employment cost index, new and pending home sales, and consumer confidence updates from both the Conference Board and the University of Michigan. The advance estimates of goods trade balance and wholesale inventories will also be in the spotlight. Finally, investors will watch corporate earnings that are packed with results from major tech companies such as Alphabet, Microsoft, Meta, and Amazon and corporations including 3M, General Motors, Spotify Technology, Verizon Communications, Snap, Visa, AT&T, Automatic Data Processing, Boeing, CME Group, Coca-Cola, QuantumScape, Mastercard, McDonald's, Ford Motor, Intel, Chevron, Exxon Mobil, and Procter & Gamble.
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.