U.S. and International Equities
Markets Finish Lower
Markets worldwide were down sharply this week with the S&P 500 Index finishing over 3% lower for the fourth week in the past five. Investors are worried that given Q3 earnings warnings and other signs of a slowing economy, the Federal Reserve (Fed) will steer the economy into a hard landing as they attempt to curb present price pressures.
Moreover, many market participants believe that Q3 estimates, which have been slashed over 6% from the end of June, will have to be cut further amid a deteriorating macroeconomic landscape. Bullish investors in the latest American Association of Individual Investors fell to 17.7% last week compared to 26.1% two weeks ago.
Fixed Income Pulls Back
The Bloomberg Aggregate Bond Index finished the week lower as inflation and the Fed’s hawkish stance remains the major themes in the bond markets this year. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, underperformed mirroring their equity counterparts. 2-year Treasuries reached 4.1% and the 10-year’s reached over 3.7%, which are the highest levels seen since 2007 and 2010 respectively.
Agency mortgage-backed securities (MBS) have underperformed Treasury securities so far this month and with mortgage rates above six percent, refinancing activity has decreased. This has caused MBS to extend to its highest duration in decades, making the asset class more prone to interest rate volatility. The near-term outlook for MBS relies on the probability of Fed asset sales, whereas the longer-term outlook is more about whether or how much the Fed actually sells from its balance sheet.
Even amid continued energy supply concerns in Europe from the Eastern European conflict, natural gas and oil declined for the second straight week. Lower prices reflect ongoing concerns over demand as well as the state of the global economy. The metals had a negative showing this week.
Economic Weekly Roundup
The Federal Open Market Committee (FOMC) increased the target rate by 75 basis points (0.75%) to a 3.25% upper bound and delivered a more pessimistic outlook in their published Summary of Economic Projections. The Committee hiked rates at this magnitude for the third consecutive time, and Federal Reserve (Fed) Chairman Powell signaled “ongoing increases…will be appropriate.” The Fed is willing to sacrifice growth for lower inflation. Growth expectations were revised materially lower for this year and next. The Fed’s new forecast for 2023 GDP growth is 1.2% with an unemployment rate of 4.4%.
August Building Permits
August building permits in the U.S. reached their lowest level since June 2020, when housing starts were just rebounding to pre-pandemic levels. High construction costs and high borrowing costs will, most likely, depress housing demand going forward. As the Fed keeps hiking rates, mortgage rates will likely rise and further weaken demand for residential real estate. Mortgage rates and housing are the areas most immediately impacted by tighter monetary policy. However, other areas of the real economy have yet to feel the full impact of rising interest rates.
German Producer Prices
German producer prices rose roughly 46% year-over-year in August, largely driven by an increase in energy prices. This is the largest increase on record and a sign of how volatile the energy situation is within Europe.
Weekly Employment Report
Initial claims for unemployment insurance for the latest week came in above the prior week while continuing claims decreased. Labor market conditions remain tight even though there are signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Building permits (Aug), durable orders (Aug), Federal Housing Finance Agency Home Price Index (Jul), S&P/Case-Shiller Home Price Index (Jul), consumer confidence (Sept), new home sales (Aug)
- Wednesday: Wholesale inventories (Aug), pending home sales (Aug)
- Thursday: Weekly initial and continuing unemployment claims, GDP (Q2)
- Friday: Personal consumption expenditure deflator (Aug), personal income (Aug), University of Michigan Sentiment (Sept)