Friday, July 21, 2023
U.S. and International Equities
The major market indexes ended mixed this week given a disparate view of earnings reports in the beginnings of second quarter earnings season. Mega-cap high-profile reports from Tesla (TSLA) and Netflix (NFLX) gave bearish investors some solace although their reports were not big misses compared to analyst expectations. That being said, the reports were not what some investors expected, especially given their present lofty market valuations.
This week, the Dow Jones Industrial Average outperformed, gaining ground for nine straight sessions. The positive move for the price-weighted index represents the longest winning streak for the Dow since August 2017.
Investors Intelligence reported bulls increased to 54.2% for the week-ending July 18, up from 51.4% the prior week. The report noted that bulls are now just shy of the 54.9% reading at the end of June, which represents the highest percentage since November 2021’s 57.2% level, causing some to believe the markets may be overbought.
Fixed Income Returns Mixed
The Bloomberg Aggregate Bond Index finished the week marginally lower as traders anticipate next Wednesday’s FOMC meeting. The benchmark bond index rebounded the week prior, after declining for three straight weeks. Last week’s better-than-expected inflation report have traders believing the Federal Reserve (Fed) is near the end of its campaign of raising interest rates.
Unhedged foreign bonds have benefited from a falling dollar. Over the last week, unhedged non-U.S. developed debt has outperformed dollar hedged non-U.S. developed debt by over 2%. While we currently have a negative view on foreign bonds due to the ongoing rate hiking campaigns in Europe, we believe valuations have improved for unhedged foreign bonds.
Energy prices ended the week higher as the major metals (gold, silver, and copper) finished mixed. As discussed last week, supply cuts from OPEC and production disruptions are causing oil prices to increase. Rising tensions between Russia and Ukraine could further lower supplies, causing commodity and agriculture prices to increase. In addition, China’s stimulus measures might also put upward pressure on commodities.
Economic Weekly Roundup
The most recent GDP report indicated China’s economic underpinning remains sluggish. Perhaps more concerning, expectations for a comprehensive stimulus plan have been ratcheted down despite the official unemployment rate climbing to 21% with youth unemployment increasing higher. With second quarter GDP missing expectations and growing at 6.3% compared with a year earlier, analysts’ estimates for the full year are in the range of 5 to 5.5%, close to Beijing’s 2023 forecast of “around 5%”.
U.K. June Inflation
U.K. inflation increased at 7.9% year over year in June, which was down from an 8.7% increase in May. Moreover, June’s rise increased at the slowest pace since March 2022. The lower-than-expected increase was aided primarily by decreasing energy costs and a tame increase in food prices. Core CPI, which excludes energy and food, rose by 6.9%, down from May’s 7.1%.
U.S. Housing Landscape
Both housing starts and building permits fell in June as the divergence between single-unit and multi-unit projects widened. Despite an appearance of renewed housing activity in recent months, housing starts are still below pre-pandemic levels. That being said, a major positive is the uptick in single-family permits issued in June as they can be a leading indicator of home building activity. The number of multi-family units under construction continues to grow as single-family projects fall.
The current housing market is best described as a tale of two economies. High borrowing costs weigh heavily on the first-time home buyer looking to get into a single-family home. However, our base case is that construction activity in multi-family projects foreshadows the coming decline in rent prices as more units become available on the market.
Weekly Employment Report
Initial claims for the latest week came in below economists’ consensus expectation as well as the prior week. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were above both the prior week’s levels and economists’ expectation. 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.
The following economic data is slated for the week ahead:
- Monday: PMI Composite (Jul), S&P Global Manufacturing and Services (Jul)
- Tuesday: FHFA Home Price Index (May), S&P/Case-Shiller Composite Home Price Index (May), Consumer Confidence (Jul)
- Wednesday: New home sales (Jun), FOMC Meeting
- Thursday: Weekly initial and continuing unemployment claims, GDP (Q2), wholesale inventories (Jun), pending home sales (Jun), durable orders (Jun)
- Friday: BEA Total Light Vehicle Sales (Jun), personal consumption expenditure (Jun), PCE Deflator (Jun), Core PCE Deflator (Jun), personal income (Jun), Michigan Sentiment (Jul)
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