Last Week in Review – September 11, 2023 – from Stephen Colavito
Last week, stocks closed lower over the holiday-shortened week as some positive economic signals drove an increase in interest rates. Growth stocks fared better than value shares, and large-caps outperformed small-caps by a wider margin. A decline in Apple, the most heavily weighted stock in the S&P 500 Index, drove part of the declines after news that Chinese government employees would no longer be able to use iPhones. Investors also may have been discouraged by reports that the upcoming iPhone 15 will be significantly more expensive than current models. Declines in NVIDIA and other chipmakers also weighed on the indexes. Markets were closed Monday in observance of the Labor Day holiday.
While not especially heavy, last week’s economic calendar seemed to drive sentiment by generally surprising on the upside. The standout appeared to be the Institute for Supply Management’s August services sector activity report, which jumped unexpectedly to its highest level since February. The report indicated that new orders were growing faster, although order backlogs fell sharply, and inventories had risen considerably. Export orders also remained healthy, although worries grew during the week about a sharp slowdown in the Chinese economy.
US - MARKETS & ECONOMY
Meanwhile, last Thursday’s weekly jobless claims report came in lower than expected, indicating continued strength in labor demand despite August’s solid increase in the unemployment rate (from 3.5% to 3.8%). Defying expectations for a slight rise, the number of Americans applying for unemployment in the previous week fell to 216,000, the lowest level in six months. Continuing claims fell to 1.68 million, the lowest level since mid-July.
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
Last week's economic numbers sparked a rise in short-term bond yields, with the yield on the two-year U.S. Treasury note briefly crossing back above the 5% threshold on Thursday afternoon. The tax-exempt municipal bond market began the holiday-shortened week quietly as market participants awaited significant new issues from California and the Port Authority of NY/NJ. These new deals came to market on Wednesday and were a drag on the secondary market as they were absorbed. The secondary market weakness continued into Thursday as yields on intermediate AAA municipal bonds rose.
In the investment-grade corporate bond market, credit spreads were resilient on Tuesday, widening only slightly amid a large amount of issuance after the holiday weekend. Later in the week, spreads tightened amid lighter issuance, which was oversubscribed. The high-yield market was reasonably quiet with below-average volumes following the long weekend. Higher-quality bonds underperformed, given the move higher in rates, while only a few new deals were announced during the week.
Our traders reported firm sentiment in the bank loan market, with steady demand for discount paper. While a few new issues came to the market, additional deals are expected over the next few weeks as issuers look to take advantage of the recent favorable conditions for the asset class.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth +0.03 bps to 5.44%
2-yr: +0.11 bps to 4.99%
5-yr: +0.10 bps to 4.40%
10-yr: +0.08 bps to 4.26%
30-yr: +0.05 bps to 4.34%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.76% lower on fears that elevated interest rates could slow down the economy. Among major stock indexes, Germany’s DAX declined 0.63%, France’s CAC 40 Index lost 0.77%, and Italy’s FTSE MIB slid 1.46%. The UK’s FTSE 100 Index advanced 0.18%.
Yields on German and Italian 10-year sovereign bonds ticked higher amid concerns about the eurozone economy. In the UK, the yield on the 10-year government bond ended higher but pulled back from its midweek highs.
A string of economic data provided more signals that the eurozone economy continues to stumble. Gross domestic product (GDP) in the bloc grew 0.1% in the second quarter, as a drop in exports contributed to Eurostat’s downward revision of its initial estimate of a 0.3% expansion. Retail sales volumes in the eurozone fell 0.2% sequentially in July, reflecting weaker automotive fuel purchases. The year-over-year decline was 1.0%.
Investor morale in the eurozone fell more than expected at the start of September, with Sentix’s index tumbling to -21.5 from -18.9 in August. Sentix said that a deepening slowdown in Germany was weighing heavily on sentiment. German industrial production in July fell for a third month, running by a greater-than-expected 0.8% sequentially. The decline was driven by a 9% drop in auto manufacturing.
Bank of England (BoE) Governor Andrew Bailey cast doubt on a possible hike in UK interest rates at the upcoming September 21 policy meeting. He told a parliamentary committee: “I think we are much nearer now to the top of the [interest rate] cycle.” Referring to the decision, he said: “The judgments now are much finer [than before].”
The BoE’s August business survey suggests underlying price pressures may wane. Companies polled in the three months through August expected to raise prices by 4.9% over the coming year, down from 5.2% in the three months to July. They also expected wages to grow by 5.0% over the coming year, unchanged from July.
Japan’s stock markets registered mixed performance over the week, with the Nikkei 225 Index down 0.3% and the broader TOPIX Index gaining 0.4%. Concerns about China’s economic slowdown and the impact on global demand weighed on investor risk appetite.
Some weak economic data releases suggested that Japan’s economy was not doing as well as previously thought, with a downward revision to second-quarter economic growth weighing on sentiment. Japan’s second-quarter 2023 gross domestic product expanded 4.8% quarter on quarter on an annualized basis, weaker than preliminary estimates of 6.0% growth. Capital spending, private consumption, and public investment were softer than anticipated.
Against this backdrop, the 10-year Japanese government bond (JGB) yield was around the 0.6% range. As the Bank of Japan keeps rates low through its policy of yield curve control, weak demand at JGB auctions suggests that investors are holding out for higher yields.
THE WEEK AHEAD
This week, all eyes will be on the CPI and Retail Sales report. Headline consumer prices are expected to rise 3.6 percent last month, accelerating for the second consecutive month. On the other hand, the core index is likely to have increased by 4.3 percent, the least since September 2021. Also, retail sales are expected to have grown only 0.2 percent month-over-month, down from July's 0.7 percent. Several other reports are worth watching, including industrial production, producer and foreign trade prices, the preliminary estimate of Michigan consumer sentiment, business inventories, the NY Empire State Manufacturing Index, and the government's monthly budget statement.
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
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