Last Week in Review – November 27, 2023 – from Stephen Colavito
Last week, stocks closed higher over a quiet holiday-shortened trading week—markets were shuttered Thursday during Thanksgiving and closed early Friday. The week brought one carefully watched third-quarter earnings report, with shares in artificial intelligence chipmaker NVIDIA—recently, the world’s sixth-largest company by market capitalization—falling after the company beat earnings and revenue estimates but issued cautious guidance because of export restrictions to China. NVIDIA’s weakness was reflected in the underperformance of the Nasdaq Composite Index, but growth stocks outperformed value stocks overall.
The holiday week also featured a couple of notable economic releases. On Wednesday, the Commerce Department reported that durable goods orders had dropped 5.4% in October, marking the second-biggest decline since April 2020. A sharp drop in highly volatile civilian aircraft orders was primarily to blame. Still, orders excluding aircraft and defense purchases—typically considered a proxy for business investment—also fell slightly for the second month.
US - MARKETS & ECONOMY
Last Friday, S&P Global released its estimates of growth in business activity in November, which indicated that a pickup in the services sector—the fastest in four months—had compensated for a bigger-than-expected slowdown in manufacturing. However, S&P noted that “relatively subdued demand conditions and dwindling backlogs led firms to cut their workforce numbers for the first time since June 2020.”
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
Slowing growth signals and dwindling inflation fears may have contributed to strong demand for a USD 16 billion auction of 20-year U.S. Treasury bonds last Monday. The healthy bid-to-cover ratio appeared to help assuage worries over a weaker auction of 30-year Treasuries earlier in the month and drive down the yield on the benchmark 10-year U.S. Treasury note to an intraday low of 4.37% on Wednesday—its lowest level in over two months. Yields rallied to close the week higher on Friday, however. (Bond prices and yields move in opposite directions.)
The rest of the fixed-income market was generally quiet over the holiday week. Spreads in the investment-grade corporate bond market tightened on Monday amid limited issuance and remained unchanged on Tuesday before Thanksgiving. Monday’s issuance was oversubscribed.
High-yield bonds traded higher on Monday amid solid equity performance and the successful auction of 20-year Treasuries. Trade volumes were light, although traders noted buyers preferred higher-quality below-investment-grade bonds. The primary market was quiet, with no new deals expected until after the holiday. Similarly, the leveraged loan market was primarily unchanged on light volumes.
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 the last week 0.91% higher amid hopes that central banks would start cutting interest rates in the first half of next year. Major stock indexes closed mixed. France’s CAC 40 Index rose 0.81%, Germany’s DAX gained 0.69%, Italy’s FTSE MIB fell 0.22% and the UK’s FTSE 100 Index lost 0.21%.
European government bond yields edged higher. Germany’s 10-year government bond yield climbed from a more than two-month low of 2.516% earlier this week. Yields rose after reports that Germany intended to suspend debt limits for the fourth consecutive year and on statements suggesting that European Central Bank (ECB) policymakers were determined to keep monetary policy tight for the time being. French and Swiss bond yields also climbed. In the UK, the yield on the 10-year benchmark bond moved higher after a Purchasing Managers’ Index (PMI) unexpectedly rose into positive territory in November.
ECB policymakers reiterated that the fight to curb inflation was not over and sought to disabuse financial markets of expectations that the central bank would soon cut interest rates. ECB President Christine Lagarde said rates could be steady over “the next couple of quarters,” while France’s François Villeroy de Galhau said rates have reached a plateau where they will probably remain for the next “few quarters.” Belgium’s Pierre Wunsch said the ECB will likely stand pat in December and January. Separately, the ECB’s October meeting minutes revealed that policymakers insisted that another rate hike should be kept on the table, even if further policy tightening was not part of the main scenario.
Japan’s stock markets registered muted returns for the week, with the Nikkei 225 Index gaining 0.1% and the broader TOPIX Index flat. Early in the week, the Nikkei rose to its highest level since 1990, boosted by a solid domestic corporate earnings season, with manufacturers’ earnings benefiting from weakness in the yen and easing supply chain constraints. Expectations that U.S. interest rates had peaked supported sentiment and notably pushed growth stocks higher.
On the economic data front, a hot October consumer inflation print stoked speculation about further monetary policy normalization by the Bank Japan (BoJ). Flash PMI data shows private sector activity stalled in November, primarily due to further deterioration in manufacturing business conditions.
Against this backdrop, the yield on the 10-year Japanese government bond (JGB) rose to 0.77% from 0.72% at the end of the previous week. The BoJ reduced its JGB purchase operations for the second straight week. In the currency markets, despite initially strengthening to its highest level in over two months amid general weakness in the greenback, the yen finished the week broadly unchanged, trading at around JPY 149 against the USD.
Stocks in China retreated as news that Beijing may introduce fresh stimulus measures for the property sector was insufficient to offset broader economic woes. The Shanghai Composite Index gave up 0.44%, while the blue-chip CSI 300 lost 0.84%. According to FactSet, Hong Kong's benchmark Hang Seng Index gained 0.6%.
Chinese regulators formulated a funding plan for property developers in its latest efforts to consolidate growth as the country grapples with an ongoing property crisis. According to Bloomberg, the list, which reportedly includes 50 private and state-owned developers, will guide financial institutions to deliver a range of financing measures to strengthen balance sheets. Separately, the National People’s Congress, China’s parliament, encouraged banks to accelerate support measures for real estate developers to reduce the risk of further defaults and ensure the completion of outstanding housing projects. The reports follow recent property data that underscored an ongoing downturn in a vital sector of China’s economy. Property investment, sales, and new home prices slumped in October.
THE WEEK AHEAD
Investors in the United States will closely follow October's income and outlay report, the second estimate of the Q3 GDP growth rate, and the ISM Manufacturing PMI. It's anticipated that PCE price inflation slowed to 3.1% last month, marking the lowest rate since March 2021, and the core rate will ease to 3.5%, the weakest in over two years. US GDP growth is expected to be revised to 5% from the initial 4.9%, attributed to accelerated consumer spending and robust exports. The ISM data is expected to indicate a continued contraction in the manufacturing sector. Moreover, insights into the US central bank's policy direction will be sought from speeches by several Federal Reserve policymakers, including Chair Powell's remarks scheduled for Friday. Additional data to watch includes new and pending home sales, Case-Shiller home prices, and advance estimates of the goods trade balance and wholesale inventories. Furthermore, the earnings season will continue with results expected from Intuit, CrowdStrike, Workday, Snowflake, Synopsys, Salesforce, VMware, and Dell.
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
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