Weekly Market Report: August 11th, 2023

Market intake points last week were limited to a few key inflation readings and the back end of 2Q earnings reports. In typical mid-August fashion (weak tape/heavier action) the S&P 500 moved a good deal on relatively thin volume finishing with a second consecutive down week following four straight weekly gains – taking what felt like an overdue breather. Last week big technology and small caps again lagged while energy, healthcare, and rate-sensitive REITs and utilities led the way. For the week, the S&P 500 closed down 0.31% (S&P 500 equal-weight slightly outperformed again) while international developed (-0.04%) and emerging (- 2.42%) were mixed with Japan/Europe generally flat but China fell 3.2%. Bonds were weaker across the board with losses concentrated in the belly as opposed to the wings. The 10yr UST yield continued to rise, closing at 4.16%. Commodities were pretty flat with no notable moves while the USD posted a respectable 0.81% gain in sympathy with the move down in risk assets.

Market Anecdotes

  • We saw mixed but generally continued moderation in monthly inflation data last week with CPI, PPI, and U of M sentiment readings. Fed funds futures have reflected the trend, now pricing in no remaining hikes for 2023 and cuts beginning in 2024.
  • The impact of shelter on inflation data remains prominent. A new model from the San Francisco Fed to forecast OER/real estate prices, concluded U.S. shelter inflation may turn negative in 2024, exacting a meaningful deflationary force on CPI.

  • The 2yr/10yr slope has steepened (less inverted) notably over the past few weeks, declining from 0.99% on July 19th to as low as 0.67% last week – a bond market that may be signaling rate cuts on the short end but a higher inflation shelf impacting the long end.

  • The consumer is experiencing rising real wages for the first time in over two years, but conflicting data metrics (credit card and auto loan delinquencies) are simultaneously raising some concerns.

  • The U.S. Treasury market may be in the process of showing us that beyond inflation, default, and interest rate fluctuations influencing bond prices, excess supply may well be climbing the board.

  • An early read on the Atlanta Fed GDPNow model shows an acceleration in third quarter GDP to 4.1% from the Q2 reading of 2.4% with positive contributions across the C + I + G + NX board.

  • Second quarter earnings season is close to completion with the headline S&P 500 contracting approximately 5%, driven mostly by a 51% decline coming from the energy sector. Profit margins continued to normalize from the record Q1 2022 high back to normal longer-term levels.

  • Export data out of China provided a clear contractionary signal with exports falling 14.5% in USD terms, further than the expected 13.2% decline. Imports also contracted more than expected (-12.4% vs -5.6%).

Economic Release Highlights

  • July CPI was generally in line with expectations on both headline (YoY 3.2%a vs 3.3%e) (MoM 0.2%a vs 0.2%e) and core (YoY 4.7%a vs 4.8%e) (MoM 0.2%a vs 0.2%e) readings.
  • July PPI accelerated to +0.31% from a friendly prior month reading of -0.08%, surprising to the upside versus consensus forecasts on both headline and core readings.

  • July NFIB Small Business Optimism Index registered 91.9, in line with consensus expectation for 91.5 and a slight improvement over the prior month reading of 91.0.

  • August’s U of M Consumer Sentiment stayed generally in line with July’s reading, registering 71.2 but also delivered some disinflationary sentiment readings.

This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.
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