Weekly Market Report: March 3, 2023
Markets digested more economic data last week and a parade of Fed speaking engagements, ending with a nice move higher Friday to post decent gains for the week across U.S. (+2%), developed international (+2.7%), and emerging markets (+3.25%). Gains were broad based across the cyclicals while most defensive sectors lagged (healthcare, utilities, staples). The yield curve became further inverted with shorter maturities
(3mo + 5bps, 2yr +8bps) rising more than the long end. The 10 yr UST briefly crossed 4% but closed just under that key psychological level by week’s end. Commodities were up over 3% thanks to a rally in oil which fell just short of $80 to close the week. The USD softened 0.66% on the week thanks to pro-risk sentiment and some elevated inflation readings in Europe.
Market Anecdotes
- Bond markets last week continued to move toward pricing in a more hawkish second half 2023 of monetary policy with economic data highlighting robust consumption in services and persistent survey based pipeline price pressures.
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The direction of core PCE and resulting monetary policy is widely accepted as the most important factor when attempting to forecast financial markets for the remainder of 2023 through inflation data trends, economic models, and survey-based data.
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Inflation may be the bigger risk to 2023 than recession with forecasts for economic growth, a well-capitalized and well- paid consumer, and expanding and readily available consumer credit.
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A quick look at sentiment measures shows fund managers remaining very underweight equities, individual investors feeling better but still short of net bullish, and overall consumer sentiment (U of M, Conf Board) improving but still depressed.
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An Alpine Macro research paper last week on the labor crisis highlighted multiple contributing factors including aging demographics, declining immigration, and a labor market mismatch – all in motion well before the pandemic with immigration seemingly the only valid solution.
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A Bloomberg article last week highlighted the rapidly fading SPAC fad noting the frequency of SPAC IPOs folding in bankruptcy or quietly wound down for cents on the dollar.
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The decline in money supply means much less since the FSRR Act passed in 2006 authorizing the Fed to pay interest on bank reserves, first used in October 2008, effectively severing the link between money supply and the price of credit.
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One notable data point on Russia’s relaxed concerns about giving China leverage over its economy is the share of Russian exports paid for in yuan rising from 0.4% to 14% since the beginning of the invasion of Ukraine.
Economic Release Highlights
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The February ISM Manufacturing Index registered 47.7, in line with the 48.0 spot forecast and within the consensus range of 47.0-49.0. The February ISM Services Index registered 55.1, in excess of the 54.5 spot forecast and within the consensus range of 53.0-55.5.
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ECB inflation data in February surprised to the upside similar to January’s readings in the U.S.
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The January Durable Goods Orders reported New Orders (-4.5% vs -4.0%),
Ex-Transportation (0.7% vs 0.0%), and Core Capital Goods (0.8% vs -0.1%). -
January Pending Home Sales were up 8.1%, well in excess of the 1% forecast and consensus range of -1.3%-1.3%.
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December’s Case Shiller Home Price Index declined -0.5% MoM, right in line with consensus, and posted a YoY increase of 4.6%, slightly below the 5.3% spot forecast.