Last Week in Review – September 18, 2023 – from Stephen Colavito
Last week, the major equity indexes finished mixed, with value stocks outperforming growth stocks. This happened as U.S. benchmark West Texas Intermediate oil prices rose above $90 per barrel for the first time since November 2022.
Technology and growth stocks lagged last week after Apple’s new product introduction event on Tuesday, which featured a price increase on its top-of-the-line iPhone 15. The products received mixed reviews, damping sentiment toward the technology sector over the week. However, broad market sentiment received a boost from the largest initial public offering of 2023 as shares of a UK microchip designer started trading on the Nasdaq on Thursday and experienced a first-day price jump.
US - MARKETS & ECONOMY
Wednesday’s release of the eagerly anticipated August consumer price index (CPI) data showed that the Federal Reserve has progressed in its fight against inflation. Still, rising energy prices may prompt the central bank to tighten monetary policy further. The headline CPI numbers showed the most significant monthly increase since August 2022, the widely expected effect of higher gasoline prices. The core (excluding food and energy) CPI increase was slightly higher than expected, but markets took the news in stride.
Similarly, the August producer price index (PPI) data released on Thursday indicated that headline producer prices climbed more than expected, with core PPI in line with expectations. Retail sales for August were strong, demonstrating that consumers remain willing to spend.
Overall, the week’s economic data didn’t seem to affect the market’s outlook for the Fed to hold rates steady at its September 19–20 policy meeting. Much of the data appeared to reinforce building expectations for a soft landing scenario in which inflation cools to the Fed’s target without a deep recession. Wall Street’s widely followed “fear gauge,” the Chicago Board Options Exchange Volatility Index, or VIX, hit its lowest point before the onset of the pandemic in early 2020.
US YIELDS & BONDS
U.S. Treasury yields increased modestly over most maturities. Municipal prices were little changed in the secondary market as investors focused on the primary market. In anticipation of the CPI data, the municipal market was tranquil early in the week, which did not meanly move prices.
Issuance was heavier than expected in the investment-grade corporate bond market, with the new supply mostly comprised of shorter-maturity bonds. According to T. Rowe Price traders, the high-yield bond market was mainly focused on the busy primary calendar, and sellers seemed to be making room for new issues. Similarly, bank loan market participants appeared to concentrate on newly issued loans.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth +0.01 bps to 5.45%
2-yr: +0.04 bps to 5.03%
5-yr: +0.06 bps to 4.46%
10-yr: +0.07 bps to 4.33%
30-yr: +0.08 bps to 4.42%
INTERESTING NEWS OVERSEAS
In local currency terms, the pan-European STOXX Europe 600 Index ended 1.60% higher after the European Central Bank (ECB) raised interest rates but signaled that borrowing costs may have peaked. Better economic data out of China also appeared to lift investor sentiment. Germany’s DAX added 0.94%, France’s CAC 40 Index gained 1.91%, and Italy’s FTSE MIB tacked on 2.35%. The UK’s FTSE 100 Index climbed 3.12%, helped by the depreciation of the UK pound versus the U.S. dollar. A decline in the UK currency helps to support the index, which includes many multinational companies that generate meaningful overseas revenue.
European government bond yields broadly declined on hopes that the ECB may have finished raising interest rates. Bond yields in the UK weakened after a bigger-than-expected drop in monthly gross domestic product (GDP) in July.
The ECB raised interest rates for the 10th consecutive time and hinted that it could be nearing the end of its monetary tightening campaign. ECB President Christine Lagarde said a “solid majority” of policymakers had backed the quarter-point hike that took the key deposit rate to 4.0%, a record high. The ECB said the move meant “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
Japan’s stock markets gained over the week, with the Nikkei 225 Index up 2.8% and the broader TOPIX Index rising 2.9%. Positive Chinese economic data supported sentiment amid tentative investor anticipation that the country’s stimulus efforts are having the intended effect on growth and markets. Strength in U.S. stocks and yen weakness, benefiting Japan’s exporters, added to the favorable investment backdrop.
Bank of Japan (BoJ) Governor Kazuo Ueda suggested that the central bank could have enough data by year-end to judge if wages will continue to rise and thereby determine whether it could end its policy of negative interest rates (given sustained wage growth is critical to the achievement of its 2% inflation target). The comments were perceived as hawkish, even though Ueda emphasized that policy normalization is still a way off. Some investors also regarded Ueda’s remarks as a verbal intervention in response to historic weakness in the yen.
While the yen strengthened following Ueda’s comments, it lost ground to finish the week broadly unchanged at the upper end of the JPY 147 range against the U.S. dollar. Due to the interest rate differential between Japan and the U.S., the yen continues hovering around its lowest level in three decades.
As a result of the speculation about potential BoJ monetary policy normalization, Japanese government bonds (JGBs) slumped, sending the yield on the 10-year JGB to 0.70%, the highest since 2013, from 0.64% at the end of the prior week.
Lastly, Chinese equities were mixed after official indicators revealed that the country’s economy may have bottomed, although data also pointed to ongoing weakness in the property market. The Shanghai Composite Index ended the week broadly flat, while the blue-chip CSI 300 Index gave up 0.83%. According to Reuters, the Hang Seng Index shed 0.1% in Hong Kong.
Official data for August provided evidence of economic stabilization in the country. Industrial production and retail sales grew more than forecast last month from a year earlier, while unemployment unexpectedly fell from July. However, fixed asset investment growth missed estimates due to a steeper decline in real estate investment. New bank loans rose an above-consensus RMB 1.36 trillion in August, up from July’s RMB 345.9 billion. Corporate demand mostly drove credit expansion, while household and longer-term loans also grew.
Inflation data revealed that consumer prices returned to growth after slipping into contraction in July. The consumer price index rose 0.1% in August from a year earlier, up from July’s 0.3% decline. Meanwhile, as expected, the producer price index fell 3% from a year ago but eased from the 4.4% drop the previous month. The inflation readings provided evidence that the worst may be over for China’s slowing economy, which led Beijing to issue a flurry of stimulus measures in recent weeks aimed at jumpstarting demand.
THE WEEK AHEAD
The FOMC is set to convene its monetary policy meeting next Wednesday, and market forecasts suggest that interest rates will remain unchanged at the current level of 5.25%-5.5%, the highest they've been since 2001. Investors are also eagerly anticipating the release of the latest Fed projections, which will provide insight into the potential impact of this unprecedented policy tightening on inflation and the labor market. Shifting our focus to economic data, the preliminary estimate of the Global PMI survey is expected to indicate further deterioration in the US manufacturing sector in September, alongside modest growth in the service sector activity. Additionally, it will be noteworthy to keep an eye on a series of housing-related indicators, including building permits, housing starts, existing home sales, and the NAHB housing market index. Lastly, the second-quarter current account figures, overall capital flows, and the Philadelphia Fed Manufacturing Index will also be released during the 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.