Last Week in Review – November 13, 2023 – from Stephen Colavito
The major indexes finished mixed last week, but not before the S&P 500 Index came close to matching its longest winning streak in nearly two decades—on Wednesday, the S&P 500 notched its eighth straight gain, while the Nasdaq Composite Index marked its ninth. The market’s strength was exceptionally narrow, however, with an equally weighted version of the S&P 500 Index lagging its market-weighted counterpart by 190 basis points (1.90)% and the Russell 1000 Value Index trailing its growth counterpart by 404 basis points—the most significant margin since March.
It was one of the final weeks of major third-quarter corporate earnings releases, and upside surprises from some technology-oriented firms appeared to support the growth indexes. In particular, high-valuation software stocks seemed to get a general boost from cloud monitoring and security firm Datadog, which surged 28% on Tuesday following stronger-than-expected earnings and guidance.
US - MARKETS & ECONOMY
U.S. Treasury debt auctions during the week seemed to play an uncommonly significant role in driving sentiment in both the equity and bond markets, according to our traders. Favorably received auctions of three-year Treasury notes on Tuesday and 10-year notes on Wednesday appeared to boost sentiment.
However, the initial catalyst in ending the significant indexes’ winning streaks appeared to be Thursday’s USD 24 billion auction of 30-year U.S. Treasury bonds, which was met with the weakest demand in two years. Investors have been paying close attention to whether demand will keep up with the government’s elevated borrowing needs, particularly after the temporary lifting of the federal debt ceiling.
There were very few economic data releases this week, most aligned with expectations. The one exception may have been the University of Michigan’s release on Friday of its preliminary gauge of consumer sentiment, which fell unexpectedly to its lowest level in six months. According to the survey’s chief researcher, the wars in Gaza and Ukraine increased concerns about higher interest rates. Long-run inflation expectations also reached 3.2%, the highest level in the survey since 2011.
US YIELDS & BONDS
Treasury yields generally decreased through the middle of last week but climbed on Thursday amid the weak 30-year Treasury auction. (Bond prices and yields move in opposite directions.) Traders may have also reacted to comments from Fed Chair Jerome Powell, who told a gathering of the International Monetary Fund that policymakers were “not confident” that they had achieved “a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time.” The tax-free municipal market felt the impact of higher yields but benefited from heavy oversubscription on many new deals that came to market during the week.
Heavy new issuance in the investment-grade corporate bond market was also met with healthy demand. Buyers in the high-yield bond asset class appeared somewhat more selective, but higher-quality bank loans continued to see solid demand.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth 0.00 bps to 5.39%
2-yr: +0.22 bps to 5.07%
5-yr: +0.18 bps to 4.69%
10-yr: +0.08 bps to 4.66%
30-yr: 0.00 bps to 4.77%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.21% lower as optimism about a peak in interest rates dimmed. Major stock indexes were mixed. France’s CAC 40 Index was roughly flat, Germany’s DAX gained 0.30%, and Italy’s FTSE MIB tumbled 0.59%. The UK’s FTSE 100 Index lost 0.77%.
European government bond yields broadly climbed as markets wrestled with the prospect of interest rates remaining “higher for longer” after hawkish commentary from policymakers. European Central Bank (ECB) President Christine Lagarde said it would take more than “the next couple of quarters” for the ECB to start cutting rates. The yield on Germany’s 10-year government bond rose above 2.7%. Italian bond yields also ticked higher. UK bond yields endured a roller coaster ride after data showed the economy stagnated in the third quarter.
Bank of England (BoE) Governor Andrew Bailey said at a central bank conference in Ireland that it was “really too early” to discuss cutting interest rates. He spoke after BoE Chief Economist Huw Pill said that financial markets pricing in an initial rate cut in August next year “doesn’t seem unreasonable,” which triggered a sharp decline in short-dated government bond yields.
UK gross domestic product (GDP) in the third quarter matched the BoE’s forecast for zero growth after expanding by 0.2% in the prior three months. Monthly GDP was better than expected, with the economy growing 0.2% in September. GDP growth in August was revised down to 0.1% from 0.2%. The Office for National Statistics said growth was driven by expansion in engineering, healthcare sales, and machinery leasing, which offset falls in health, management consultancy, and commercial property rental.
Japan’s stock markets rose over the week, with the Nikkei 225 Index up 1.9% and the broader TOPIX Index gaining 0.6%, supported by strong corporate earnings, the government’s commitment to additional economic stimulus, and continued currency tailwinds. The yen weakened past the 151 level to the U.S. dollar, from around 149 the prior week, depreciating to its lowest in about 33 years. Investor risk appetite was dampened toward the end of the week by hawkish comments from Federal Reserve Chair Jerome Powell, who said that the U.S. central bank wouldn’t hesitate to tighten monetary policy further if needed to contain inflation, raising expectations that interest rates will remain higher for longer.
In contrast, Bank of Japan (BoJ) Governor Kazuo Ueda warned that normalizing short-term interest rates will be a severe challenge due to the potential impact on financial institutions, borrowers, and aggregate demand. Speaking at a conference organized by the Financial Times news organization, he said it is too early to determine what the central bank will do when it normalizes its policy stance. He added that the bank is progressing toward reaching its 2% inflation target.
The yield on the 10-year Japanese government bond (JGB) fell to 0.85% from 0.91% at the end of the previous week. JGB yields remained elevated, however, following the BoJ’s October adjustment of its policy of yield curve control, the second tweak in three months. Effectively allowing yields to rise more freely, the central bank now regards its 1.0% ceiling for 10-year JGB yields as a reference rather than strictly capping interest rates at that upper bound. However, Governor Ueda has repeatedly stated that the 10-year JGB yield is unlikely to rise significantly above 1.0%.
Lastly, Chinese equities rose as investors remained broadly unmoved by data showing that consumer prices slipped back into contraction, reviving the specter of deflation hanging over the economy. The Shanghai Composite Index rose 0.27%, while the blue-chip CSI 300 gained 0.07%. According to FactSet, the Hang Seng Index fell 2.61% in Hong Kong.
The consumer price index fell 0.2% in October from the prior-year period after remaining unchanged in September, as lower pork prices weighed on food prices. Meanwhile, the producer price index dropped 2.6% from a year ago, marking the 13th consecutive month of decline.
THE WEEK AHEAD
In the United States, the most significant release will be the October CPI. Consumer prices rise 0.1% from September, which would mark the lowest reading in four months, mainly due to a fall in gasoline prices. Excluding fuel and energy, however, core CPI likely rose 0.3%, the same as in September, leaving the annual rate steady at 4.1%. Meanwhile, retail sales are seen falling 0.1%, marking the first decrease in seven months. Other critical indicators include producer prices, industrial production, the Philadelphia Fed Manufacturing Index, the NAHB Housing Market Index, building permits, and housing starts. Simultaneously, the earnings season continues with Home Depot, Cisco, Target, Walmart, and Applied Materials among the companies due to report quarterly results.
There will be no update next week.
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.