Weekly Market Performance – Markets Lower Following U.S. Government Debt Downgrade
U.S. and International Equities
The major market indexes ended lower this week as international equities lagged the U.S. markets. Investors took risk off the table amid this week’s U.S. government debt downgrade along with a bevy of mixed earnings reports.
In the latest Investors Intelligence survey, the percent of bulls increased from 55.6% to 57.1%, which is the peak last seen during November 2021. The percent of bears declined to its lowest level since early 2022 at 18.6%. The bull-bear spread widened to 38.5% in the past two weeks, a level not seen since two years ago. This bullish report gave some credence to investors worried that the markets were getting overstretched.
After the Japanese Nikkei reached a four-week high Monday and the Bank of Japan’s surprise monetary policy in raising their interest rate cap, investors took some profits in Japanese equities. Moreover, the European economic climate remains somewhat of a wildcard with June German industrial orders growing much more than economists anticipated.
Fixed Income Returns Mixed
The Bloomberg Aggregate Bond Index ended lower for the third straight week. June’s better-than-expected inflation and personal spending reports have traders believing the Federal Reserve (Fed) is near the end of its campaign of raising interest rates, however the Fed continues to reiterate that it remains data dependent. Bond investors will be keying in on next week’s July inflation report to see if present deflation trends are still intact.
U.S. Debt Downgraded
This week, Fitch downgraded U.S. government debt to AA+ due to “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades”. We believe the rating downgrade will likely not have an impact on U.S. government debt. The U.S. remains a safe haven during times of market stress and the downgrade will likely not change that. Moody’s still has the U.S. at Aaa while S&P remains at AA+.
Commodities Mostly Lower
Energy prices ended the week mixed as the major metals (gold, silver, and copper) sold off.
With U.S. stockpiles of crude oil and fuel products lower than expectations, reflecting stronger than expected demand, prices for West Texas Intermediate (WTI) have climbed above $80 a barrel. In addition, as forecasts for a stronger economic recovery prove to be correct, oil demand should see a pickup in the U.S. and globally.
Energy companies have been reporting earnings which have eased as oil prices marched lower; however, they have been optimistic about future demand. Moreover, they maintained their attention to shareholders and continued to announce share buybacks and dividend increases.
Economic Weekly Roundup
German Second Quarter Economic Landscape
The German economy stagnated during the second quarter of 2023. Weak purchasing power, higher interest rates, and decreased industrial activity weighed on the euro zone’s largest economy, which remained the worst-performing major euro zone economy during this period. The government pushed back on calls for a stimulus package, citing worries about prolonging inflation. Investors should know the German economy has begun to lag behind other European economies and could struggle to post growth in 2023.
U.S. Credit Card Usage
Credit card usage can provide us with an indicator of consumer health. The national average credit card debt among cardholders with unpaid balances in December 2022 was $7,279. Moreover, 65% of cardholders say they carry a balance at times. In addition, nearly half say it would take them at least a year to pay off their balance. This is all in an environment of interest rates at their highest since the data series began in 1972. An important investment takeaway from this metric is the potential downside risk to growth for the latter half of this year.
China Consumer Spending
The Caixin services sector July report inched higher, reflecting a pick-up in Chinese consumer spending, and stronger demand for services. The Caixin services purchasing manager index (PMI) climbed to 54.1, higher than consensus estimates and stronger than last month’s 53.9 print. A reading above 50 represents expansion.
Japan June Industrial Output
Japan’s industrial output increased by 2.0% in June compared to the previous month, reversing a 2.2% contraction witnessed in May. Production in mines managed to grow consistently, and factory output increased as well. Overall orders increased by 1.5%, the first increase in three months. Inventories also experienced a slight decrease, falling by 0.1%.
Weekly and Monthly Employment Report
Initial claims for the latest week came in at economists’ consensus expectation and exceeded the prior week’s print. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were also at consensus and came in above the prior week. 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.
July jobs report shows that headline payrolls rose by 187,000, with last month’s gain revised down to 185,000. Gains were mainly in health care, social assistance, and financial services as much of the overall service sector was strong. The unemployment rate ticked down to 3.5% from 3.6% in June and has ranged from 3.4% – 3.7% since March 2022, indicating a tight labor market.
The following economic data is slated for the week ahead, in addition to another 170 S&P 500 companies reporting second quarter earnings:
Monday: Consumer credit (Jun)
Tuesday: NFIB Small Business Index (Jul), trade balance (Jun), wholesale inventories (Jun)
Thursday: Weekly initial and continuing unemployment claims, July Consumer Price Index, hourly earnings (Jul), average workweek (Jul), Treasury budget (Jul)
Friday: Producer price index (Jul), Michigan Sentiment (Aug)
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