Weekly Market Performance – Markets Pullback on Strong Economic Data and Energy Prices
U.S. and International Equities
The major market indexes sold off this week as investors continue to mull the Federal Reserve’s (Fed) next moves amid a resilient economic landscape. Higher energy prices also weighed on the inflation outlook. China’s widening ban on government use of Apple’s iPhone this week had investors concerned over the state of the technology sector, as much of the sector’s top and bottom lines are dependent on the world’s second-largest economy.
According to the AAII Sentiment Survey, the percentage of bullish investors jumped from 33.1% to 42.2% this week, tracking above the historical long-term average of 37.5%. Bearish investors declined to 29.6% from 34.5%, below the 31% historical average. Neutral investors declined 4.2% to a below-average reading of 28.2%.
Fixed Income Lower
The Bloomberg Aggregate Bond Index ended the week lower, struggling to maintain its footing as investors believe the Fed could maintain its hawkish sentiment longer than anticipated. High yield bonds also lost ground this week.
A few months ago, we asked the question: Has the high yield market lost its mind (see blog post here)? Since then, the high yield corporate credit market has continued to show its resilience with the Bloomberg U.S. Corporate High Yield Index up over 6.8%, year to date.
Despite the solid returns, downgrades and defaults continue to eat away at future returns. However, spreads, or the additional compensation for owning risky debt, continue to shrug off the bad news. Moreover, credit metrics, particularly for the lowest-rated cohort within the index, continue to deteriorate with more than half of the CCC-rated borrowers with earnings lower than their interest payments making future payments and refinancing potentially problematic.
Commodities Mostly Lower
West Texas Intermediate crude oil ended the week positive as commodities struggled. 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.
On the demand side of the equation, world oil demand is ‘scaling at record highs,’ according to the International Energy Agency. They recently reported that world fuel usage reached 103 million barrels per day in June and forecasted that August would likely see another new high amid surging travel demand this summer, stronger-than-expected Chinese consumption, and increased oil use in power generation.
Economic Weekly Roundup
Fed Beige Book
The most recent beige book highlights profit margins reportedly falling across the region due to businesses having trouble passing along input costs. The problem is input prices are not decelerating as fast as retail prices. This is leading to consumers feeling less inflationary pressures, however, it comes at the cost of smaller profit margins for businesses.
Supply constraints, which caused issues during the pandemic, are no longer part of the economic narrative with the exception of single-family homes where the country has had an undersupply of homes for several years. The implication is the housing market could likely see a dearth of affordable housing for several years.
August ISM Services
The U.S. services sector unexpectedly gained steam in August, with new orders firming and businesses paying higher prices for inputs. In addition, prices paid by purchasing managers reversed course, reverting to levels from April. In addition, the report indicated that business activity has been growing at a slower pace since the end of 2021 as consumers spend down their excess savings.
Japanese Household Spending
Japanese household spending declined by 5% year-over-year in July, representing the most dramatic drop in two years. Education and household expenditures dropped the most by 19.8% and 18.6%, respectively. Spending on food also declined by 2.8%, primarily because of rising fish and meat prices. Investors should know that as inflation remains and real wages continue to decline, spending by Japanese households is unlikely to recover in the near term.
Eurozone August PMI
According to the August Eurozone PMI, business activity dropped to the lowest since November 2020, as an elevated cost of living and higher borrowing costs worked to ease consumer spending. Investors should know that weaker global demand could combine with lower consumer spending to threaten the economic landscape within the Eurozone.
France’s Policy to Curb Inflation
France’s finance minister recently announced successful talks with 25 companies that will see either price freezes or cuts on 5,000 everyday products. Negotiations between these companies and government officials are expected to continue until mid-October, and the resulting price cuts are expected to take effect in January. Investors should know these talks were held with the goal of reducing food inflation, which rose 11% in August.
Weekly Employment Report
Both continuing and initial claims for the latest week came in below economists’ consensus expectation along with 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:
Tuesday: NFIB Small Business Index (Aug)
Wednesday: Consumer Price Index (Aug), hourly earnings (Aug), average workweek (Aug), Treasury budget (Aug)
Thursday: Weekly initial and continuing unemployment claims, Producer Price Index (Aug), retail sales (Aug), business inventories (Aug)
Friday: Export/import price index (Aug), capacity utilization (Aug), industrial production (Aug), manufacturing production (Aug), Michigan sentiment (Sept)
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