U.S. and International Equities
Markets Solidly Lower
The major market indexes ended lower for the third straight week as the 10-year Treasury remained near recent 16-year highs as investors believe that the Fed may maintain a hawkish stance amid decelerating inflation. This week, U.S. retailer earnings helped reinforce consumer resilience, however the outlook is clouded by the prospect of rising rates. The Nasdaq Composite, Dow Jones Industrial, and S&P 500 Index are presently trading below their 50-day moving average.
According to the AAII Sentiment Survey, the percent of bullish investors declined 8.8% to 35.9%, which is just below the historical long-term average of 37.5%. In addition, neutral investors jumped 4.2% to 34%, which is above the long-term average of 31.5% while bearish investors increased 4.6% to just below the 31% historical average.
Fixed Income Lower
The Bloomberg Aggregate Bond Index ended lower for the fifth straight week and is now negative year-to-date. After this week’s FOMC minutes, traders believe that the Fed could maintain a hawkish stance longer-than-anticipated. High yield bonds also lost ground and are still positive year-to-date as credit conditions tighten and defaults climb.
Investment grade corporate bond spreads are 0.05% from their year-to-date tightest level as key data including the Fed, Q2 earnings, and July economic data all have come and gone with generally positive outcomes for markets. The soft landing narrative has become mostly/fully priced in so any outcome other than this will likely push spreads higher.
Commodities Mostly Lower
Energy prices ended lower as the major metals (gold, silver, and copper) were mixed this week. Even with U.S. stockpiles of crude oil and fuel products lower than expected, concerns over the global economic landscape, especially in light of China’s real estate and slumping trade numbers, caused energy prices to pull back slightly. Despite this, oil has still climbed over 7% in the last month.
Economic Weekly Roundup
China’s Challenging Economic Outlook
China has delivered a bevy of weaker-than-expected economic data releases last week. In particular, trade data and reports indicating producer and consumer prices have entered a deflationary phase. Now, a prominent property developer, Country Garden, is on the cusp of default, while a major financial conglomerate active in the secretive shadow banking arena has failed to make payments in one of its trust units.
Given the overlap and deep entanglements within the country’s financial infrastructure and the broad reaching relationships between financial entities, concern is mounting that without bailouts from Beijing, more firms may succumb to a potential financial domino effect. This, in light of a property market mired in debt, as the property market represents nearly 25% of China’s GDP. In addition, issues are now surfacing within the shadow banking system, it isn’t surprising that loan growth for consumers and businesses has slowed decidedly.
As the world’s second-largest economy, and long considered a primary engine of global growth, Beijing’s reluctance to introduce a comprehensive fiscal stimulus program to spur economic growth and curb rising unemployment among the country’s younger population, begs the question of how far they’ll allow the economy to deteriorate amid mounting concerns concentrated on the core of the country’s financial system. Moreover, investors are presently wondering whether China’s challenges could adversely affect the global economic landscape.
U.S. July Leading Indicators (LEI)
The index continued to decline last month, reaching its lowest level since June 2020. Given the downward trajectory of the LEI, we believe there are at least two reasons that a recession has not materialized yet. During the past two years, consumers had plenty of excess savings and also had a willingness to use credit to support spending.
Investors must come to grips with the uniqueness of this economic cycle. We are hesitant to say it, but this time does appear different. Normally, the economy would be in recession when the Conference Board data looks this frail. We read in the Fed’s minutes that officials are nervous about the unknown cumulative impact of monetary policy tightening to date. Tighter credit conditions will eventually dampen economic activity and markets are choppy from the uncertainty.
The Federal Reserve released minutes from its July Federal Open Market Committee (FOMC) meeting Wednesday. Members of the committee remain highly attentive to inflation risks, so it seems the Fed hawks are still influencing policy. The Fed’s 2% inflation target is averaged out over the long run and since committee members are highly attentive to the lagged impacts from tighter policy, it’s completely possible the Fed could pause despite inflation above 2% in the near term.
UK’s Marginal Economic Growth
The U.K. economy grew 0.2% in Q2, bringing total growth since the beginning of 2022, when COVID-19 restrictions began to ease, to 0.4%. This is the slowest pace of growth in the last 65 years, excluding recessions. Further, the overall economy is 0.2% smaller than it was before the pandemic, signaling there has yet to be a full recovery from COVID-19. July’s U.K. retail sales numbers also looked weak as one of the wettest July’s on record scared shoppers away, contributing to 1.2% fall in sales.
Issues relating to inflation and heightened borrowing costs persist for the British consumer. Investors should know that the U.K.’s economy continues to stall and will likely post lackluster growth until inflation can be reined in.
Weekly Employment Report
Initial claims for the latest week came in just below economists’ consensus expectation along with the prior week’s print. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were above consensus along with the prior week. We believe the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
- Tuesday: Existing Home Sales (Jul)
- Wednesday: Building Permits (Jul), PMI Composite (Aug), S&P Global Manufacturing and Service (Aug), New Home Sales (Jul)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Durable Orders (Jul),
- Friday: Michigan Sentiment (final) (Aug)
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