Weekly Market Report: September 13th, 2024

Markets rebounded nicely from the prior week with a muzzled FOMC, a relatively light economic calendar, an uptick in the soft-landing narrative, and an increased possibility of a 50 bps move by the Fed leading U.S. equity markets to five consecutive up days and the S&P 500 (+4%) back within 1% of its record high. The NASDAQ 100 (+6%) and Russell 2000 (+4.3%) led the way while developed (+2.2%) and emerging (+2.5%) markets lagged. Interest rates fell again across the curve leaving the 10yr UST yielding 3.66% and the 2yr 3.57% with the slope remaining in positive territory. The USD closed relatively flat while commodity markets were up roughly 1.5%, including oil which closed at $68.65.

Market Anecdotes

• Despite warmer inflation data making the case for 25 bps cut, futures markets moved suddenly toward a higher probability (50%) of a 50 bps rate cut last week with Dudley’s comments in Singapore and WSJ and FT articles making the case for 50bps.
• An interesting cross-asset class perspective from JPMorgan showed how bond markets and base metals are pricing in much higher recession probabilities than equity markets and credit spreads.
• The ECB delivered what markets were expecting, which was a second 25 bps deposit rate cut to 3.5% and a 60 bps cut to the refi rate to 3.65% in order to narrow the gap between the two.
• A Bloomberg article reiterated that while unemployment has increased from 3.7% to 4.2%, about half of the move has come from new entrants and reentrants who don’t find work immediately.
• BCA and Alpine Macro strategists continue to see a clear path to a Republican administration with gridlock highly likely due to the economy and/or simple quirks of the Electoral College. Budget deficits, trade protectionism, and governmental influence in the private sector remain the primary market focus.
• Not to be overlooked are the significance of China’s deflationary forces and economic challenges where prices have declined for five consecutive quarters, something we haven’t seen since the late 1990’s back when China represented only 3% of global GDP (> 20% today).
• Bloomberg highlighted the outflows occurring in Bitcoin ETFs, estimating investors are sitting on a record $2.2b in unrealized losses. Investor adoption has been overwhelmingly retail (75%-80%) with professional investors the remainder.

Economic Release Highlights

• August CPI YoY Headline (2.5% vs 2.6%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.3% vs 0.2%) were generally in line with consensus estimates.
• August PPI YoY Headline (1.7% vs 1.8%) and Core (2.4%) along with MoM Headline (0.2% vs 0.2%) and Core (0.3% vs 0.3%) were generally in line with consensus estimates.
• NFIB Small Business Optimism Index deteriorated versus the prior month and registered below the consensus estimate (91.2 vs 93.6).
• The UofM Consumer Sentiment Index (69.0 vs 68.0) improved slightly versus prior month and 1-year inflation expectations fell one tick to 2.7%.

Weekly Market Report: September 6th, 2024

While the soft landing narrative still seems in charge, the month of September started out with a pretty rough week. Some single name narratives combined with a dose of concerning economic data resulting in a 4.2% loss in the headline S&P 500 and sharply lower bond yields. Developed and emerging equity markets were both down approximately 3.5% while small caps and the NASDAQ (growth stocks) were both down close to 5%. Ten year and 2yr UST yields fell from 3.91% to 3.72% and 3.66% respectively last week, leaving the 2yr/10yr in positive slope territory for the first time in two years. WTI crude oil fell sharply (-10%) to close at $68.22/barrel.

Market Anecdotes

• Monetary policy narratives focused on a trio of labor market reports last week leaving Fed Funds futures pricing in more of a ‘front-loaded’ path with six cuts now priced in over the next four meetings. Markets still see probabilities at 70% for 25 bps and 30% for 50 bps on September 18.
• UST yields hit fresh 52-week lows this week which can be seen as a ‘tailwind’ for equities due to a lower discount rate, but the ‘tailwind’ can certainly manifest as a ‘headwind’ if the reason for declining yields is heightened risk of economic and earnings slowdown.
• Bespoke noted that, while a lower Fed Funds rate (and very short end of the yield curve) needs to wait for formal FOMC policy announcements, bond markets price in forecasted policy moves in real time, allowing new issuers of corporate bonds and ABS to enjoy lower rates now.
• If recession fears are rising, the high yield bond market certainly doesn’t see it with spreads at 3.29%, well below the long-term average of 5.32%.
• The 2yr/10yr yield curve spread closed in positive territory last week for the first time since July 2022. The 3mo/10yr remains deeply negative at -1.41%, not too far off the cycle low of -1.86%.
• While hard data and soft (survey) data are clearly positively correlated, a chart from MRB acts as a good reminder that soft data tends to ‘overshoot’ on both up and down swings leaving investors best served focusing on hard economic data and corporate earnings trends.
• Commodity markets have been very mixed this year with oil, agricultural commodities, and most industrial metals down on the year countered by a very strong year for gold.
• The U.S. budget deficit has averaged 2.57% of GDP since 1948 with a recessionary 2009 GFC deficit of 9.75% and 2020 pandemic deficit of 14.7%. The 2023 budget deficit was 6.3% with 2024 projected near 7%.

Economic Release Highlights

•  August payrolls came in below the consensus estimate (142,000 vs 160,000) and the unemployment rate declined from 4.3% to 4.2% as forecasted.
• Labor force participation was unchanged at 62.7% and average hourly earnings edged higher and came in above consensus forecast on both MoM (0.4% vs 0.3%) and YoY (3.8% vs 3.7%).
• The JOLT Survey in July reported a significant decline in job openings to 7.673M, well below consensus forecast of 8.1M and the prior month reading of 8.184M.
• ISM Services Index for August registered 51.5, remaining in expansionary territory and coming in slightly above the consensus forecast of 51.1. ISM Manufacturing Index for August registered 47.2, relatively in line with the consensus forecast of 47.5.
• The JPM Global Composite PMI (C,M,S) of (52.8, 49.5, 53.8) showed a slight improvement in composite and services readings offset by slight deterioration in manufacturing.
• The Fed Beige Book on qualitative economic backdrop reported “flat or declining” activity in nine of twelve Fed districts.

Weekly Market Report: August 30th, 2024

Market Anecdotes

• The hiking cycle of 2.5 years and 500 bps is set to end September 17-18 with limited data points between now and then, where markets firmly expect a Fed rate cutting cycle to begin, begging the question, which equity asset classes have historically benefitted the most?
• Second quarter S&P 500 earnings were up nearly 12% YoY with 74% of firms topping estimates, including Nvidia, last week, handily beating forecasted earnings ($0.68 vs $0.65) and revenue ($30b vs $28.9b).
• Alpine Macro published an interesting piece on AI concluding that a valuation premium exists due to market expectations of higher revenue, a boost to EBITDA, enhanced productivity, and higher GDP growth but it is not currently meeting the definition of bubble or mania. 
• Expectations for a soft landing path for the U.S. economy to transpire has increased notably since April as data indications have maintained a positive tone and model projections, including the Atlanta Fed GDPNow model have remained consistently above 2%.
• Along with the positive 2Q GDP revision last week, we received data on corporate profits which grew 1.7% pre-tax with after-tax aggregate profit margins edging higher from 15.2% to 15.4%.
• Housing market data last week reinforced the tepid outlook for the time being with inventory, rates, and prices posing tangible headwinds to prospects of any near-term recovery. 
• A Penn Wharton Budget model estimates that, despite spiraling national debt and massive budget deficits, both team R and team D are forecasted to deliver the status quo. 
• According to Bloomberg’s data set, as recently as 2017 passive mutual funds and ETFs accounted for 35% of assets. That grew to 50.1% in December 2023 and has continued its march higher with the July 2024 tally at 51.3%.

Economic Release Highlights

• August YoY PCE inflation was in line with expectations for both headline (2.5%) and core (2.6%) alongside MoM readings of 0.2% for both headline and core PCE. Personal income grew slightly more than forecast (0.3% vs 0.2%) and PCE was in line with spot consensus at 0.5%.
• 2Q U.S. GDP was revised higher in the second estimate from 2.8% to 3.0% thanks in large part to stronger personal consumption which was revised up from 2.3% to 2.9%.
• Consumer Confidence in August improved to 103.3 from July’s 101.9 reading, ahead of both the spot consensus 100.1 and forecast range of 99.5 to 103.0.,
• Case-Shiller Home Price Index for June rose 0.4%, more than the consensus forecast of 0.2%.
• Pending Home Sales in July fell 5.5%, well more than the forecasted 1.1% increase projected.
• Durable Goods Orders report for July jumped 9.9%, well in excess of the 4.5% spot consensus and above the high end of the forecast range of -0.3% to 9.0%.

Weekly Market Report: August 23rd, 2024

Last week, markets absorbed a relatively light economic calendar, the Jackson Hole Symposium, and a handful of remaining 2Q earnings reports. While the S&P 500 and NASDAQ snapped their 8-day winning streak last week, they still managed to post a nice weekly gain of approximately 1.4%. Small caps (+3.5%) and developed international (+3.1) both posted strong gains while emerging markets gained 1%. Bonds rallied as interest rates fell across the curve. The biggest move was in 2yr yields, down 16 bps to 3.90%. Longer maturities declined as well with the 10yr closing 8 bps lower to yield 3.81%. The USD fell 1.7%, continuing its descent since late June while commodity markets were mixed with energy price declines offset by strength in industrial metals.

Market Anecdotes

• The soft landing narrative has been dominant with the S&P 500 back to pre-July jobs report levels, and the Nikkei back to where it was prior to the Yen carry trade unwind. Cool inflation numbers, strong retail sales, and some light unemployment claims have aided momentum.
• The July FOMC meeting minutes released last week were dovish as expected and contained no material surprises. Several participants mentioned reported payroll gains might be overstated, which was indeed the case with an 818k downward revision announced on Wednesday.
• Powell’s remarks before the Jackson Hole Symposium indicated what markets were expecting, which is that “The time has come for policy to adjust” and that “the timing and pace will depend on incoming data, the evolving outlook, and the balance of risks.”
• Fed funds futures are pricing in a 25 bps cut in September with a 24% chance of 50 bps to begin the cutting cycle. Beyond that, markets see 1.25% of easing through the four meetings ending January and a total of eight cuts over the next 12 meetings.
• A ClearBridge study examined the drivers behind the rise in unemployment from 3.7% to 4.3%, concluding the higher percentage of “new entrants and re-entrants”’ instead of “job losers and leavers” supports the idea that the job market may be stronger than the data suggests.
• Overall financial conditions in the U.S. have become very supportive as measured by the Goldman Sachs FCI. However, the pace of labor market deceleration has the potential to trigger a feedback loop which may cause overall financial conditions to begin to tighten.
• The USD marked a new 2024 low last week, fueled in part by decelerating labor market concerns. USD is down 5% from its 2024 high back in April, 3% of which happened in August.
• As the November elections draw closer, we will begin to analyze fiscal policy (and executive actions?) as it relates to aggregate demand and financial markets as well as the longer-term implications of U.S. government deficit spending.

Economic Release Highlights

• The August Flash U.S. PMI saw the Services Index beat (55.2 vs 54.0) and the Manufacturing Index miss (48.0 vs 49.5) translating to a healthy Composite Index (54.1 vs 53.3).
• The August Flash Eurozone PMI (C,M,S) registered (51.2, 45.6, 53.3) where the manufacturing index missed and services index exceeded expectations. The UK registered (53.4, 52.5, 53.3), beating forecasts for both manufacturing and services readings.
• Existing Home Sales in July of 3.95M came in slightly above spot consensus of 3.90M, increasing 1.3% MoM and down 2.5% YoY. New Home Sales in July of 739K were well above the spot forecast of 628k and the consensus forecast range of 605k-648k.
• The Conference Board LEI Index registered -0.6% in July, extending its lengthy deteriorating trend.

Weekly Market Report: August 16th, 2024

Market Anecdotes

• Equity markets welcomed last week’s busy economic calendar following recent concern surrounding a slowdown in the U.S. economy. The inflation, retail sales, and labor market indicators generally served to soothe markets.
• Economic data and FedSpeak last week translated to reduced market expectations for aggressive rate cuts where probabilities of a 50 bps cut at the upcoming September FOMC meeting fell from 51% to 26% but a 25 bps cut is carrying a 75% probability.
• As the Fed approaches an easing cycle Bespoke noted, despite cuts already from many central banks, the GDP weighted average global policy rate has only fallen 25bps since the 6%+ level.
• The unofficial close of 2Q earnings season with the Walmart report on Thursday leaves the S&P 500 with YoY blended earnings and revenue growth were 10.9% and 5.2%, respectively.
• A recent survey by Affirm showed 59% of respondents falsely believe the U.S. is currently in recession, likely due to the difficulty of inflation pressure on lower income households. The most recent Bloomberg survey shows 30% of economists expect recession within a year.
• A hazardous materials explosion at the world’s third busiest container port, the Ningbo Port in China, leading to its indefinite closure, is expected to impact key trans-Pacific trade lanes, supply chains during peak shipping season.
• An index from Eurekahedge which tracks hedge funds who utilize AI and machine learning theory suggests that portfolio manager jobs appear to be safe, at least for now with the S&P 500 dramatically outperforming, particularly since ChatGPT was launched.

Economic Release Highlights

• July CPI YoY Headline (2.9% vs 3.0%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.2% vs 0.2%) both registered generally in line with consensus estimates.
• July PPI YoY Headline (2.2% vs 2.6%) and Core (2.4% vs 3.0%) along with MoM Headline (0.1% vs 0.2%) and Core (0.0% vs 0.2%) came in below both forecast and prior month readings.
• The July NY Fed Survey of Consumer Expectations reported 3-year inflation expectations fell by 0.6% to 2.3% while median 1yr (3.0%) and 5yr (2.8%) were unchanged.
• July Retail Sales were above the high end of the forecast range and well above the spot forecast for Headline (1.0% vs 0.3%), Ex-Vehicles (0.4% vs 0.1%), and Ex-Vehicles & Gas (0.4% vs 0.3%).
• Weekly Jobless Claims were below the spot forecast and toward the low end of the range (227k vs 234k). The labor market has seen tour week moving average claims fall from 241k to 236.5k.
• The July NFIB Small Business Optimism Index registered 93.7, above both the spot forecast (91.7) and toward the high end of consensus range (91.6-92.0).
• August UofM Consumer Sentiment reading of 67.8 was slightly better than spot consensus 67.0 and within the forecast range (65.0-69.1).
• The Housing Market Index dropped in August to 39, missing the consensus estimate of 42.
• July Housing Starts (1.238M vs 1.342M) and Permits (1.396M vs 1.430M) slowed down from June and came in below estimates.
• July Industrial Production cooled relative to June’s strong 0.6% reading and came in below forecast (-0.6% vs -0.1%).

Weekly Market Report: August 9th, 2024

Global equity and bond markets endured another volatile week despite a notable lack of catalysts. U.S. equity markets spent most of the week clawing back from Monday’s selloff thanks to a reappearance of the soft- landing narrative, an uptick in corporate buyback activity, and bounce momentum leading to lower systematic selling estimates. Last week saw a relatively light economic calendar and a continuation of second quarter earnings reports. U.S. equity markets were down and up during the week but ended flat (-0.04%) while international developed (+0.49%) and emerging (+1.11%) both managed marginal gains. Bond yields continued to reclaim lost ground of the past two weeks in what was a relatively parallel shift higher approximately 12 to 18 bps. The USD was unchanged against a basket of currencies, including the Yen, and commodity markets traded higher thanks in large part to a 4.5% rally in WTI crude oil which closed up 4.5% to $76.84.

Market Anecdotes

• Examining market internals and trending economic data over the past two weeks in an effort to conceptualize the sudden surge in volatility leaves our short term (neutral) and intermediate term (cautious) views largely unchanged.
• Apollo noted the low level of job cuts to reinforce the idea that the Sahm Rule does not apply to the current labor market due to the significant increase in immigration.
• A close look at the behavior of high yield credit spreads made clear there was not a material spike in perceived credit risk to go along with the material spike in equity market volatility.
• Several strategists have highlighted market leadership rotation evident since the soft July 11th CPI report, seemingly a marker for reestablishing the disinflation narrative and an associated dovish monetary policy pivot acknowledging labor market deterioration.
• Now in the later stages of the earnings season (91% of S&P 500 reported), second quarter blended earnings have grown 10.8% with beat rates of 78% and beat margins of 3.5%. Revenue grew by 5.2% with below average beat rates (59%) and beat margins (0.5%).
• Bloomberg’s Taro Kimura noted recent speculative Yen short positioning is as ‘offside’ as we’ve seen since the Yen carry trade implosion we saw back in 2007.
• The 2/10 curve which has been inverted since July 2022 ‘uninverted’ briefly last week which, in the past four recessions, has happened on average two to six months past the beginning of the recession.
• Trepp CMBS Research noted 30-day CMBS delinquencies ticked higher in July to 5.45%, up from 4.41% last year, with over 65% of newly delinquent loans coming from the office sector which is now over 8%, up sharply from 4.96% last year.
• The global geopolitical landscape remains in flux with a potentially large conflict looming in the middle east between Israel and Iran.

Economic Release Highlights

• The July ISM Services Index (51.4 vs 51.0) was generally in line and improved over June’s 48.8.
• The JPM Global Composite PMI registered a composite reading of 52.5 and services of 53.3.
• Weekly jobless claims came in below expectations (233k vs 240k) and the 4-week moving average claims increased to 240k.