Last Week in Review – June 26, 2023 – from Stephen Colavito
Last week the major benchmarks closed lower in a holiday-shortened trading week. The Nasdaq Composite suffered its first weekly decline in two months, while the S&P 500 Index recorded its first drop in six weeks. Growth stocks outperformed value shares, while large-caps fared better than small-caps. The annual rebalance of the Russell indexes on Friday appeared to keep volumes muted earlier in the week as some investors prepared to shift the allocations of their portfolios in response. Markets were shuttered on Monday in observance of the Juneteenth holiday.
Signs that further Federal Reserve rate hikes lay ahead seemed to weigh on sentiment for much of last week. In prepared testimony before Congress on Wednesday and Thursday, Fed Chair Jerome Powell stated that “nearly all [policymakers] expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” Indeed, the Fed’s latest Summary of Economic Predictions revealed that most of those on the policy committee expect at least two more quarter-point rate hikes in the coming year—although futures markets continued to predict that was unlikely. On Thursday, news that the Bank of England and Norges Bank, Norway’s central bank, had accelerated their rate hikes also seemed to intensify rate fears.
US - MARKETS & ECONOMY
Much of the week’s economic data seemed to deepen worries that tight monetary policy was pushing the U.S. into recession. Last Friday, S&P Global reported that its gauge of U.S. manufacturing activity had fallen back to its lowest level since December and well below consensus estimates. The report also showed suppliers have been cutting prices faster since the heart of the pandemic lockdown in May 2020, presumably in response to weak demand.
Although Fed Chair Powell insisted to Congress that the labor market remained tight, weekly jobless claims hit 264,000, matching the previous week’s upwardly revised number, the highest level since October 2021. The housing sector showed some surprising strength, however, with housing starts coming in at their highest level in over a year and well above forecasts. Sales of existing homes also surprised modestly on the upside.
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
Longer-term U.S. Treasury yields ended roughly unchanged and traded in a narrow band over the week. Municipal bonds outperformed over much of the week, helped by strong demand for higher-yielding new issues. Sales from the Federal Deposit Insurance Corporation (FDIC) of recently acquired assets from distressed banks were also strongly bid.
The investment-grade and high-yield corporate bond markets were subdued over the holiday-shortened trading week. The bank loan market was also calm, but our traders noted that portfolio managers of collateralized loan obligations were a source of demand in the secondary market.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth +0.07 bps to 5.29%
2-yr: +0.03 bps to 4.74%
5-yr: +0.01 bps to 3.99%
10-yr: -0.02 bps to 3.73%
30-yr: -0.04 bps to 3.81%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index fell 2.93% on worries that further interest rate increases might cause a recession in Britain and the eurozone. A disappointing economic recovery in China and hawkish comments by U.S. Federal Reserve Chair Jerome Powell also contributed to the gloom. Major stock indexes struggled, with Germany’s DAX dropping 3.23%, France’s CAC 40 Index slid 3.05%, and Italy’s FTSE MIB losing 2.34%. The UK’s FTSE 100 Index declined 2.37%.
Recession fears pushed European government bond yields lower. Purchasing manager surveys showed that private sector business activity had slowed significantly, weighing on 10-year German bond yields. French and Swiss yields also declined. The 10-year government bond yield in the UK weakened as the economic outlook darkened after the Bank of England (BoE) increased interest rates.
The BoE unexpectedly raised its key interest rate by half a percentage point to 5.0%—the highest since 2008. The Monetary Policy Committee (MPC) voted 7–2 to step up the pace of policy tightening after the latest inflation data came in unexpectedly strong. “There has been significant upside news in recent data that indicates more persistence in the inflation process,” the MPC said.
Headline annual consumer price growth failed to slow down for a fourth month running in May, at 8.7%. Core inflation, which excludes volatile food and energy prices, accelerated to a 31-year high of 7.1% from the 6.8% registered in April.
Japan’s stock markets retreated from their 33-year highs, with the Nikkei 225 Index falling 2.7% and the broader TOPIX Index finishing the week 1.6% lower. Some of the declines were attributable to profit-taking following the markets’ year-to-date solid performance. Japan’s hot May core consumer inflation print weighed on sentiment and fueled speculation that the Bank of Japan (BoJ) would revise its inflation forecasts upward in July. Comments by BoJ board member Seiji Adachi appeared to rule out the chance of a tweak to the central bank’s yield curve control policy at its meeting next month—although the BoJ has previously suggested that a certain degree of surprise may be unavoidable.
The 10-year Japanese government bond yield fell to 0.36% from 0.41% at the end of the prior week. Domestic yields remained under pressure as the BoJ continued to signal its commitment to ultra-loose monetary policy, marking a divergence from the tightening stance of the other major central banks, which appear poised to raise rates further in the second half of the year.
The yen weakened to about JPY 143.1 against the U.S. dollar from about JPY 141.8. The currency slumped toward the levels that prompted Japanese policymakers to intervene in the foreign-exchange market late last year to halt its decline. Finance Minister Shunichi Suzuki said he was closely watching foreign exchange rates and that sharp currency moves were undesirable. USD-JPY levels are determined by markets and based on fundamentals—but they should move stably, Suzuki added.
Lastly, Chinese stocks retreated after a holiday-shortened week as investor confidence waned over a lack of stimulus measures amid the flagging post-pandemic recovery. The Shanghai Stock Exchange Index fell 2.3%, while the blue-chip CSI 300 gave up 2.51%. In Hong Kong, the benchmark Hang Seng Index declined 5.74%, its most significant drop in three months. Financial markets in mainland China were closed Thursday through Friday for the Dragon Boat Festival holiday, while the Hong Kong Exchange was closed on Thursday and reopened for trading on Friday.
No major indicators were released in China during the week. However, mounting evidence that the country’s recovery is losing steam raised concerns about the economic outlook. The lackluster results in recent weeks have led economists at several key banks to lower their 2023 growth forecasts for China, which is struggling with slowing export demand, a yearslong housing market slump, and weak business and consumer confidence.
THE WEEK AHEAD
In the US, the personal income and outlays report is expected to show that consumer spending growth slowed to 0.2%, while income grew at a steady 0.4%. Meanwhile, the PCE price index, which serves as the Federal Reserve's preferred inflation measure, is likely to show the price pressures eased slightly in May. Additionally, durable goods orders are anticipated to decline for the first time in 3 months in May. Several other vital data points warrant attention, including new and pending home sales, S&P/Case-Shiller home prices, Chicago PMI, Dallas Fed Manufacturing Index, advance estimates of the goods trade balance and wholesale inventories, and the final readings of first-quarter GDP and June's Michigan consumer sentiment. Investors will also closely monitor the release of the Federal Reserve's stress test results on Wednesday to gauge banks' resilience.
Stephen Colavito
Chief Investment Officer
San Blas Securities
This message is provided for informational purposes 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, which is available upon request.