U.S. and International Equities
The major markets ended mixed this week as the utilities and consumer discretionary sectors led while information technology lagged following Apple’s challenges in China. Developed international equities posted solid gains this week as European stocks have witnessed their largest gain in six months after the European Central Bank (ECB) signaled an end to its hawkish monetary policy.
Next Wednesday, the Federal Reserve meets concerning monetary policy and interest rates. We believe the Federal Reserve should highlight underlying improvements within the inflation dynamic. In addition, we believe the Fed will not likely declare victory but will probably highlight the risks to growth and inflation are getting into balance.
According to the AAII Sentiment Survey, the percentage of bullish investors declined from 42.2% to 34.4% this week, tracking below the historical long-term average of 37.5%. Bearish investors declined slightly to 29.2% from 29.6%, below the 31% historical average.
Fixed Income Mixed
The Bloomberg Aggregate Bond Index ended the week marginally lower. In addition, high yield bonds gained ground this week even as default risks increase. While consensus expectations continue to move towards a soft landing, the corporate credit markets are seemingly only pricing in a soft landing. In other words, credit markets continue to discount the possibilities of any adverse economic shock and remain rich to potential risks.
Since 2010, the overall stock of municipal debt has remained relatively unchanged at $4.0 trillion, despite corporate credit and Treasury markets increasing by 65% and 170%, respectively, over the same period. While the stock of municipal debt has remained steady, the composition of these holders has evolved over the past decade and even this year, according to data released by the Federal Reserve last Friday.
Commodities Mostly Lower
Energy prices ended the week positive as the major metals lost ground. The recent rally in energy has largely been underpinned by tightening supply expectations following Saudi Arabia and Russia’s decision to extend their production cuts until December. This means the Saudis will hold output at nine million barrels per day, marking the lowest production quota in several years. Russia will reduce exports by 300,000 barrels per day over the same period. Moreover, on the demand side of the equation, world oil demand is ‘scaling at record highs,’ according to the International Energy Agency.
Economic Weekly Roundup
August Consumer Price Index
Headline consumer prices increased 3.7% year-over-year, which is up from 3.2% year-over-year in July. This is the second straight increase after 12 consecutive declines in headline inflation. Core prices, which exclude food and energy items, are still high however the increases are slowing as they increased 0.3%, following 0.2% rise the previous month. Yesterday’s August CPI report showed energy prices increased 5.6% month over month, which represents the largest monthly growth since June 2022.
August Import Prices
Annual headline import prices declined for several months in a row as cost of capital goods and auto parts declined. Monthly import prices are mixed. Excluding food and fuels, import prices continue to decline as supply chains improved and consumer demand for goods softened. Despite the 6.5% increase in petrol prices in August, the monthly increase is still below the monthly spike in March 2022 after Russia invaded Ukraine. The downward trajectory of import prices implies domestic inflation will likely continue to ease in the coming months.
European Central Bank Increases Rates
The European Central Bank decided to raise interest rates by an additional 25 basis points, bringing the total to 4.50%. The move comes as the ECB released inflation predictions that highlighted decreasing but persistent inflation through the remainder of 2023 and 2024, with inflation only nearing the ECB’s 2% target towards 2025. Investors should know that another rate hike is expected to bring inflation closer to the ECB’s goal and reduce pressure on the average consumer.
German ZEW Economic Sentiment Index
The German ZEW Economic Sentiment Index showed that investors are still not confident in an economic turnaround in the next six months. September’s index fell to -11.4, well below the 0 threshold that separates bullish and bearish sentiments. Investors cited instability caused by conflict and unusual climate episodes, as well as inflation and decreased manufacturing output. Investors should know that near-term risks are rising for the biggest economy in Europe.
U.S. August Small Business Report
The National Federation of Independent Business small business optimism index declined in August, marking the 20th consecutive month below the 49-year average of 98. The survey noted that 23% of small business owners reported inflation as the single most important business problem, up two points from last month.
Weekly Employment Report
Both continuing and initial claims for the latest week came in below economists’ consensus expectation however they surpassed 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%.
The following economic data is slated for the week ahead:
- Monday: NAHB Housing Market Index (Sept)
- Tuesday: Building Permits (Aug), Housing Starts (Aug)
- Wednesday: FOMC Meeting
- Thursday: Weekly Initial and Continuing Unemployment Claims, Leading Indicators (Aug), Existing Home Sales (Aug)
- Friday: S&P Global Manufacturing and Service PMI (Sept)
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