Friday, September 1, 2023
U.S. and International Equities
The major market indexes ended higher amid a challenging August. Last month, the large-cap index and the Nasdaq Composite had their first down month since February. Markets have been underpinned by a meaningful rate reprieve, continued traction behind the soft-landing narrative, and growth in artificial intelligence.
Seasonality has been a popular bearish talking point in recent weeks as August and September are the two worst months for both the S&P 500 Index and Nasdaq Composite based on data going back to 1971. That said, September has not typically been a weak month when the S&P 500 Index was already up double-digit percentages year-to-date through the end of August. The S&P 500 Index is currently up over 18% year-to-date, which could help put this narrative to rest.
According to the AAII Sentiment Survey, the percent of bullish investors increased slightly to 33.1%, which is below the historical long-term average of 37.5% while bearish investors declined slightly to 34.5%, above the 31% historical average. Flow data highlighted a trend of outflows from US equities and continued inflows to Treasuries/money markets assets.
Fixed Income Higher
The Bloomberg Aggregate Bond Index ended higher for the second consecutive week, reversing five straight weeks of declines. High yield bonds also gained ground for the second-straight week.
Taxable money market fund (MMF) balances have increased by $770 billion year-to-date, representing the second largest inflow into this asset class since 2012. Given the current trajectory, flows could easily surpass 2020. A variety of factors contributed to the AUM surge such as the substantial yield pickup in MMFs over bank deposits, a desire to diversify liquidity following the mini banking crisis earlier this year, along with an inverted yield curve.
Commodities Mostly Higher
Energy prices and most of the major metals (gold and copper) finished positive. Energy prices had a solid week after US government data showed tighter-than-expected crude supplies in US, amid Hurricane Idalia’s impact on the southern U.S. Moreover, market watchers expect Saudi Arabia, the world’s largest oil exporter, to extend its voluntary output declines into October, keeping oil supplies tight.
Economic Weekly Roundup
The number of job openings fell to 8.8 million, the lowest since March 2021. This is certainly good news for policy makers concerned about the tight labor market. In yesterday’s JOLTS report, fewer workers quit in July, a sign that individuals are less inclined to quit their current job in hopes of getting higher pay elsewhere. This should dampen wage pressures within some sectors of the economy.
July Spending and Income
Goods inflation declined 0.3% from a month ago, however service prices rose 0.4% from last month illustrating the divergence within the domestic economy. Although services inflation ticked up in July, the overall inflation trajectory improved from earlier this year.
China introduced additional stimulus measures to help its stock market as the government reduced stamp duties, restricted share sales and lowered deposit ratios for margin trading. We do not believe these stimulus measures are enough to help propel the Chinese economy or generate material and sustained stock market gains, however the China stimulus campaign is probably not over.
In an attempt to reverse disappointing economic activity, the German government announced a corporate tax cut plan that will equal approximately $34 billion in cuts over the next four years. The law seeks to jump start economic activity, making it easier for corporations to reinvest and carry out general business activities. Investors should know that while it will take time to see the effects of tax cuts, the fact that the German government is taking tangible actions to support economic activity should be well-received.
UK August PMI
Business leaders appear to be less confident that the United Kingdom’s economy will continue to grow at the same pace throughout the remainder of 2023. August PMI data declined to 47.9 from 50.8, firmly entering contraction territory. A reading of 47.9 represents the lowest since January 2021. Inflation, higher borrowing costs, and issues relating to employment have all combined to create a cost of living crisis that has the potential to slow down economic growth. Investors should know that the cost of living crisis could take away from projected growth and push the nation toward stagnation.
Weekly and Monthly Employment Report
Initial claims for the latest week came in just below economists’ consensus expectation along with the prior week’s print. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were above consensus and above the prior week.
The unemployment rate in August rose to 3.8%, the highest since February 2022 and a sign the labor market is loosening. Businesses added 187,000 to their payrolls in August and the gains were fairly broad-based. In addition, wages grew 4.3% from a year ago and hours worked also increased, showing signs that business activity is still fairly solid, despite tight credit conditions.
The following economic data is slated for the week ahead, in addition to another 170 S&P 500 companies reporting second quarter earnings:
- Tuesday: BEA Total Light Vehicle Sales (Aug), durable orders (Jul), factory orders (Jul)
- Wednesday: Trade balance (Jul), PMI Composite (Aug), S&P Global PMI Services (Aug), ISM Services PMI (Aug)
- Thursday: Weekly initial and continuing unemployment claims, unit labor costs (Q2), productivity (Q2)
- Friday: Wholesale inventories (Jul), consumer credit (Jul)
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