U.S. and International Equities
Markets Mostly Lower
The major markets ended mixed this week as investors believe the potential for additional rate increases is high following the latest FOMC meeting. The Federal Reserve indicated that interest rates will remain higher and they believe it will take longer to bring inflation in line.
Earnings estimates for 2023 and 2024 are unchanged since March and over the past month, impressive given cost pressures, the strong U.S. dollar, and lingering effects of the pandemic on labor supply and supply chains. LPL Research believes current consensus S&P 500 earnings estimates may be a bit high, particularly for 2024. Our forecasts are calling for $213 and $230 (+8%) in S&P 500 earnings per share in 2023 and 2024.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors increased from 27.8% to 30.1% this week which is tracking below the historical long-term average of 37.5%. Bearish investors increased for the third straight week from 40.9% to 41.6%, well above the 31% historical average.
Fixed Income Lower
The Bloomberg Aggregate Bond Index ended the week lower amid the present Federal Reserve monetary policy. In addition, high yield bonds lost ground this week, we believe that rising default risks appear to not yet be fully priced into the high yield market.
The big driver of the sell-off in Treasury yields continues to be an upgraded economic growth story (as opposed to a pick-up in inflation expectations) with Treasury Inflation-Protected Securities (TIPS) driving nominal yields higher. With real yields above 2% along the yield curve, which is the highest levels since 2009, laddered TIPS portfolios could be worth considering.
Commodities Mostly Lower
Natural gas and energy prices finished mixed this week as the major metals pulled back. Natural gas demand is projected to reach a new record this winter but sufficient storage, higher production and a slowing economy are likely to weigh on U.S. natural gas prices, the Natural Gas Supply Association stated this week.
Oil settled more than $5 lower on Wednesday, which represents its largest daily drop in over a year, as some investors are concerned that peak demand for fuel consumption is waning. Government data this week showed a sharp decline in U.S. gasoline demand. Finished motor gasoline supplied, an indication for consumer demand, dropped last week to its lowest level since the start of 2023.
Gold prices edged lower for a ninth straight session on Thursday this week, as U.S. data indicated that tight labor market conditions will allow the Federal Reserve to keep interest rates higher for longer. This makes non-income producing gold less attractive relative to risk-free income-producing U.S. treasuries.
Economic Weekly Roundup
German Manufacturing PMI
Germany’s September Manufacturing PMI rose slightly to 39.6, up 0.5 from last month. Decreased demand, falling construction activity, and an overall output falling to levels not seen since 2020 have weakened confidence considerably. The 39.6 is firmly in contraction territory and is not expected to reverse course throughout the remainder of the year.
U.S. September ISM Services
Last month’s ISM Services showed growth in the services industry is slowing but so far, it appears to be likening to a soft landing. Executives in the financial services space reported slower banking and leasing volume but rising bankruptcies. Tighter financial conditions are slowing corporate demand for credit, indicating a slower outlook for growth. Purchasing managers in food services saw lower prices for most commodities as inflation pressures ease.
China Manufacturing PMI
China’s September Manufacturing PMI dropped slightly from the previous month to 50.2. Disappointing global demand and higher costs for materials suppressed the index, reaching a new 12-month low. Many firms announced new layoffs, which increased calls for government action and highlighted weakness in production and demand. Investors should know that although factory output did grow, increased costs and falling demand ensure there could be trouble ahead for China’s manufacturing sector.
September ADP Report
September’s ADP Report noted that momentum within the labor market is slowing across the board in both goods-producing and services-producing businesses. Large businesses have shed jobs for four out of the past five months as overall business activity moderates. Job stayers saw a 5.9% year-over-year pay increase in September, marking the 12th straight month of slowing wage growth. Pay gains also shrank for job changers, to 9%, down from 9.7% in August.
The labor market is cooling and is taking pressure off the Fed concerned with the risk of a second wave of inflation. Businesses should get some respite as inflation decelerates and the labor market comes into balance.
Weekly and Monthly Employment Report
Initial claims for the latest week came in below economists’ consensus expectation but above the prior week’s print. However, continuing claims came in below both the expectations as well as the prior week.
Payrolls in September grew by 336,000, too hot for markets and the Fed but investors must look past the headline for emerging trends. Headline job growth was concentrated in restaurants, hotels, and government employment, mostly in sectors paying lower wages. Average hourly earnings rose 0.2% from a month ago, the same pace as last month and a pace not likely to spur inflation. Markets will likely be disappointed with such a big gain in hiring. The unemployment rate stayed at 3.8%, unchanged from last month.
The following economic data is slated for the week ahead:
- Tuesday: NFIB Small Business Index (Sep), Wholesale Inventories (Aug)
- Wednesday: Producer Price Index (Sep), FOMC Minutes (Sep)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Consumer Price Index (Sep), Hourly Earnings (Sep), Average Workweek (Sep), Treasury Budget (Sep)
- Friday: Export/Import Price (Sep), Michigan Sentiment (Oct)
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