Last Week in Review – October 2, 2023 – from Stephen Colavito
Last week, higher oil prices contributed to concerns that inflation could prove more difficult for central banks to tame, spurring a sell-off in bonds. As the week wore on, the increasing likelihood of a U.S. government shutdown (although avoided) may also have weighed on investor sentiment.
The S&P 500 Index suffered a fourth consecutive weekly pullback as upward pressure on rates weighed on investor sentiment. Within the index, utilities lost the most ground. Energy stocks, on the other hand, outperformed. The S&P MidCap 400 Index and the small-cap Russell 2000 Index, which have lagged large-caps meaningfully this year, eked out gains.
US - MARKETS & ECONOMY
In August, the core personal consumption expenditures (PCE) index, which the Federal Reserve watches closely and excludes the volatile food and energy categories, increased 3.9% from year-ago levels—the lowest annual inflation rate in about two years but below the central bank’s 2% target. This latest reading represents a moderation from the upwardly revised 4.3% annual inflation rate logged in July. On a month-over-month basis, core PCE inflation reached 0.1%, below expectations. Including all items, monthly inflation quickened to 0.4% from 0.2% in July, mainly driven by higher energy prices.
Although recent manufacturing surveys have signaled weakness in new orders, durable goods orders, and shipments increased month over month in August. Headline orders increased 0.2%, paced by strength in machinery. Consensus expectations had called for a decline. Excluding transportation, durable goods orders rose 0.4% from July. This metric, considered a near-term indicator of the economy’s health, omits the transportation category because the hefty price tags on aircraft and other equipment create the potential for large orders that can distort underlying trends.
The Conference Board’s gauge of U.S. consumer confidence dipped to 103.0 in September, a reading below expectations and down from the preceding month’s upwardly revised reading of 108.7. Much of this weakness stemmed from the survey’s expectations component, which declined 9.6 points to 73.7, as the percentage of respondents who thought a recession was “somewhat” or “very likely” ticked up after falling in August.
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
The benchmark 10-year U.S. Treasury note yield peaked above 4.6% last Wednesday. (Bond prices and yields move in opposite directions.) However, 10-year Treasury yields ticked modestly lower after releasing encouraging eurozone and U.S. inflation data. Tax-exempt municipal bonds and high-yield bonds also came under selling pressure.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth 0.00 bps to 5.47%
2-yr: -0.06 bps to 5.05%
5-yr: +0.06 bps to 4.61%
10-yr: +0.14 bps to 4.57%
30-yr: +0.18 bps to 4.70%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.67% lower amid concerns about a prolonged period of higher interest rates and a weak Chinese economy. France’s CAC 40 Index slid 0.69%, Germany’s DAX declined 1.10%, and Italy’s FTSE MIB fell 1.16%. The UK’s FTSE 100 Index lost 0.99%.
European government bond yields broadly climbed as investors focused on the higher-for-longer rates narrative in financial markets. Germany’s benchmark 10-year government bond yield rose to nearly 3%—a level unseen in more than a decade—before backing off this high on Friday. Italian bond yields also advanced amid concerns that the government would need to increase debt issuance next year to finance a more significant deficit. In the UK, the yield on the benchmark 10-year bond climbed above 4.5% before retreating a bit on Friday.
A handful of European Central Bank (ECB) officials—including ECB President Christine Lagarde and Chief Economist Philip Lane—reaffirmed their commitment to maintaining a restrictive monetary policy for an extended period to bring inflation back to the 2% target. Meanwhile, ECB Executive Board member Frank Elderson said in an interview with Market News International that rates have not necessarily peaked and that future monetary policy decisions would depend on incoming data. Austrian central bank Governor Robert Holzmann went further, suggesting in an interview with Bloomberg that persistent inflationary pressures may lead to further rate hikes.
Japan’s stock markets fell, with the Nikkei down 1.7% and the broader TOPIX Index declining 2.2%. Concerns about U.S. interest rates potentially remaining higher for longer and the soaring oil price weighed on sentiment. However, investors welcomed the Japanese government’s new economic stimulus plan announcement. Meanwhile, slowing core inflation in the Tokyo area lent support to the Bank of Japan’s (BoJ’s) staunch commitment to its ultra-accommodative monetary policy stance in pursuit of its inflation target.
The yen mainly traded within the JPY 148 range against the USD, although it briefly weakened past JPY 149 to hit an 11-month low. This added to speculation that Japanese authorities could intervene in the foreign exchange market to prop up the yen, having repeatedly stated that they would respond appropriately to rapid currency moves. However, Finance Minister Shunichi Suzuki denied that the authorities have in mind a specific level for the U.S. dollar-Japanese yen exchange rate that would trigger an intervention.
Lastly, Chinese stocks fell in a holiday-shortened week as a lack of positive economic news dampened investor sentiment. The blue-chip CSI 300 Index and Shanghai Composite Index fell for the week ended Thursday. Stock markets in mainland China were closed Friday, the start of a 10-day holiday for the Mid-Autumn Festival and National Day, and will reopen Monday, October 9. In Hong Kong, the benchmark Hang Seng Index fell 1.37% for the week ended Friday.
No official economic indicators in China were released during the week. But a private survey showed that prices in China are recovering, assuaging fears of a prolonged deflation. World Economics reported that its all-sector price index for China rose to a 14-month high in September. “This suggests fears of Chinese price deflation ushering in a Japanese-style period of very low or negative growth have been overblown,” said the London-based data company, which created the widely used Purchasing Managers’ Indexes now owned by S&P Global. “The signs of a resumption of growth in [China] over recent decades are looking a little more positive.”
The World Economics survey was the latest data point indicating that China’s economy may have bottomed after losing momentum following a brief post-lockdown recovery in the first quarter. Official data for August released earlier in September also pointed to signs of stabilization in the Chinese economy. Industrial production and retail sales grew more than forecast year on year, while unemployment unexpectedly fell from July. However, fixed-asset investment growth missed expectations due to a steeper decline in property investment.
THE WEEK AHEAD
Important economic data released this week are several labor market readings, including the JOLTS Job Openings report and the unemployment rate for September.
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
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