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October 2, 2023 - Markets Mostly Lower Amid Feds Higher for Longer Interest Rate Stance

| October 02, 2023

Index Performance

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U.S. and International Equities

Markets Mostly Lower

Most of the major market indexes lost ground this week as investors see the potential for additional rate increases given last week’s FOMC meeting. The Federal Reserve indicated that interest rates will remain higher and it will take longer to bring inflation in line.

Stocks have struggled given the Federal Reserve’s (Fed) “higher for longer” policy stance as investors believe the central bank’s actions may result in both an economic and earnings contraction. In addition, oil prices are seen as a major overhang in the inflation narrative as gasoline prices are up over 10% since last month.

According to the most recent AAII Sentiment Survey, the percentage of bullish investors declined for the third straight week from 31.3% to 27.8% this week, tracking below the historical long-term average of 37.5%. Bearish investors jumped again from 34.6% to 40.9%, well above the 31% historical average.

Fixed Income Lower

The Bloomberg Aggregate Bond Index ended the week lower on the back of last week’s Federal Open Market Committee (FOMC) meeting. In addition, high yield bonds lost ground this week, however less than the aggregate bond index. We believe that rising default risks appear to not yet be fully priced in.

The yield curve continues to dis-invert (bear steepen) with longer maturity securities selling off more than shorter maturity Treasury securities. Bear steepening is far less frequent and usually doesn’t persist long term, so we think ultimately this current move will be short-lived, but as long as the curve remains deeply inverted, upward pressure on long-term yields may remain.

Commodities Mostly Lower

Natural gas and energy prices finished positive as the major metals pulled back.  Surging prices for soft, agricultural, commodities are entangling the inflation landscape.  Many agricultural commodities have increased in price in recent months, given weather-related challenges worldwide. Futures contracts on orange juice, live cattle, raw sugar and cocoa each hit their highs for the year in September amid lower supplies. The S&P Goldman Sachs Commodity Index (GSCI) Softs (soft commodity) index has increased more than 18% in 2024.

Economic Weekly Roundup

August Personal Income / Spending

Core inflation increased 0.1% from a month ago, which came in softer than expected as price increases are moderating.  On an annual basis, core inflation is 3.9%, down from a revised 4.3% last month, which is a positive. Real disposable income fell for the second consecutive month, a likely indicator that consumers will enter the final quarter of the year on softer footing. Moreover, in August, core services inflation excluding housing rose 4.4% from a year ago, down from 4.8% the previous month, and showing investors that services inflation is starting to moderate.

U.K. Retail Sales

British retail sales increased 0.4% month over month in August, reversing July’s 1.1% drop. August’s growth was primarily driven by a return to in-person shopping, as internet sales dropped slightly over the same period. Shoppers mostly spent on food and clothing-related products. Investors should know that although inflation remains elevated and a general cost of living crisis continues to loom, monthly sales grew six times this year.

European August Inflation

The Eurozone Manufacturing PMI for September came in firmly in contraction territory and down from August’s reading. The manufacturing sector continues to contract as new orders fell, production levels declined, and employment dropped for the fourth straight month. Firms were further challenged by rising prices for raw materials and other inputs. Investors should know that while European manufacturing is still technically declining, it seems to have stabilized above summer lows.

German September Inflation

German annual inflation came in at 4.5%, representing a drop of 1.6 percentage points from the previous month. The decline is in-line with a wider decrease in inflation seen across the Eurozone. With inflation remaining above the European Central Banks’s (ECB) 2% target, it is possible further hikes can be seen this year. Although the German economy could still contract through the end of this year, a drop in inflation is still a positive sign for Europe’s biggest economy.

Japan Economic Stimulus

The Japanese Prime Minister announced the creation of a new economic stimulus package meant to ease rising prices and increase wage growth. The package will focus on reducing prices on necessary household goods, incentivizing wage growth, increasing domestic investment, and supporting infrastructure growth.

Weekly Employment Report

Both continuing and initial claims for the latest week came in below economists’ consensus expectation but above the prior week’s print. 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. Signs of this can be seen amid last month’s employment report as the unemployment rate ticked up to 3.8%.

Week Ahead

The following economic data is slated for the week ahead:

  • Monday: S&P Global PMI Manufacturing (Sep), Construction Spending (Aug), ISM Manufacturing (Sep)
  • Tuesday: JOLTS Job Openings (Aug)
  • Wednesday: BEA Total Light Vehicle Sales (Sep), ADP Employment Survey (Sep), PMI Composite (Sep), S&P Global PMI Services (Sep), Durable Orders (Aug), Factory Orders (Aug), ISM Services (Sep)
  • Thursday: Weekly Initial and Continuing Unemployment Claims, Trade Balance (Aug)
  • Friday: Hourly Earnings (Sep), Average Workweek (Sep), Manufacturing Payrolls (Sep), Nonfarm Payrolls (Sep), Private Nonfarm Payrolls (Sep), Unemployment Report (Sep), Consumer Credit (Aug)



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