Weekly Market Performance – Markets Decline On Continued Inflation Concerns
U.S. and International Equities
Stocks ended the week lower on the back of Federal Research Chair Powell’s Senate Banking Committee testimony as he reiterated the central bank’s higher-for-longer mantra this week. Concerns over the banking sector given SVB Financial’s challenges also caused market participants to lighten portfolio risk. The S&P 500 Index this week fell to a seven-week low, below its 200-day moving average.
A relative bright spot this week was developed international. Japan’s Nikkei reached a six-month high this week as investors believe that the Bank of Japan will maintain its ultra-accommodative stance in the near-term. In addition, Japan’s wholesale inflation fell for a second straight month as household spending came in mixed.
Fixed Income Finished Mixed
The Bloomberg Aggregate Bond Index finished the week little changed as yields steadied as they increased for four straight weeks. Bonds have been directly influenced by concerns over the general inflationary landscape as some traders believe the Federal Reserve will maintain its higher-for-longer policy. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, underperformed this week, but are leading most fixed income areas year-to-date despite economic growth concerns.
U.S. bank equities came under significant pressure on Thursday following reports that SVB Financial was taking steps to raise capital in response to large losses on its securities portfolio. In the bond market, the reaction has been far more contained. While regional banks underperformed the broader index, large U.S. banks were better behaved relative to their equities, likely indicating the bond market is not viewing this week’s event as a larger systemic risk.
Commodities Mostly Lower
Energy prices finished lower this week as traders grew concerned over future demand given Powell’s comments concerning inflation and interest rates earlier this week. The major metals, gold, silver, and copper, also ended the week mixed amid concerns over economic growth.
Economic Weekly Roundup
During Tuesday’s Senate Banking Committee testimony, Federal Reserve (Fed) Chairman Powell stated that recent stronger-than-expected economic activity could prompt the Fed to lift rates higher than previously expected. Furthermore, Powell noted, “the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” suggesting a restrictive stance of monetary policy will be required “for some time.”
The Fed’s policy rate is currently in the 4.50% – 4.75% range. As of December, Federal Reserve Officials believed the policy rate could rise to a peak of around 5.1%. Prior to today’s testimony, many expected the Fed to raise rates by 0.25% in March. However, after Tuesday’s Senate meeting, markets are now pricing in an approximately 66% chance of a 50 bps (or 0.50%) hike this month. The terminal rate is also expected to reach 5.50% – 5.75% sometime during the June through September timeframe.
February’s Beige Book report noted six of the twelve Fed districts saw little or no change in economic activity while six saw activity expand at a modest pace. Observed consumer spending generally held steady, though some modest-to-strong growth in retail sales during what is normally a slow period. Travel and tourism remained fairly strong, while manufacturing activity stabilized. Housing markets remained subdued, but there was an unexpected uptick in some eastern districts.
Employment continued to increase in most districts despite some hiring freezes and layoffs, adding labor availability improved (though finding qualified workers remained challenging). Also, firms are becoming less flexible about remote-work options, and that wage increases are expected to moderate further in the coming year.
Used Car Prices Witness an Unexpected Price Jump
Manheim Used Vehicle Value Index, which tracks wholesale used-car prices at dealer auctions, showed a month-over-month 3.7% increase in used car prices during February. In addition, Manheim notes that February’s increase represents the largest growth for the month on record since a 4.4% rise in February 2009. Although prices were down 7% from levels reached a year earlier, now they are trending back toward record levels last reached in January 2022.
Manheim also reports that this increase is not typical for this particular time of the year. Dealer inventory has been light, but improving. However, the nation’s aging fleet of cars has turned over at a relatively slow rate. S&P Global Mobility along with Kelly Blue Book state that the average automobile age presently on the road reached an all-time high of over 12 years in May 2022.
As inflation shows signs of receding, there are still some pockets of the economy where price pressures are resinous. This week’s used car report caused many economists to raise inflation estimates for February. We still believe that overall trend for inflation will decline, however areas like air transportation are still showing marginal signs of price improvement. The dynamics of the automobile market will be closely watched as consumer will eventually be forced to replace older vehicles.
Weekly and Monthly Unemployment Report
Initial and continuing claims for the latest week came in above economists’ expectations as well as the prior weeks’ report. That being said, labor markets continue to show limited signs of softening amid increasing layoffs.
For the month of February, companies added 311,000 new payroll jobs in February after adding just over half a million new jobs in January. Most of these gains were in the services sector such as health care, retail, and leisure & hospitality. Consumer demand for services will support this portion of the jobs market. The unemployment rate rose to 3.6% in February from 3.4% in January.
The following economic data and potentially market-moving events are slated for the week ahead:
Tuesday: National Federation of Independent Business Small Business Index (Feb), Consumer Price Index (Feb), hourly earnings (Feb), average workweek (Feb)
Wednesday: Producer Price Index (Feb), retail sales (Feb), business inventories (Feb), National Association of Home Builders Housing Market Index (Mar)
Thursday: Weekly initial and continuing unemployment claims, building permits (Feb), export and import price index (Feb), housing starts (Feb)
Friday: Capacity utilization (Feb), industrial production (Feb), manufacturing production (Feb), leading indicators (Feb), Michigan sentiment (Mar)
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