Last Week on Wall Street - August 26th, 2023
S&P 500: 0.82% DOW: -0.45% NASDAQ: 2.26% 10-YR: 4.24%
What Happened? Equities experienced a volatile week as traders sifted through Fed speak and a key earnings report out of Nvidia. Indices eeked out gains led by the tech-heavy Nasdaq. Overall, there was not a clear trend in trading action as we saw gyrations on lighter volume. Treasury yields have garnered much attention as of late as they pushed toward 16-year highs.
Many traders were highly anticipating Fed Chair Jerome Powell's Jackson Hole Symposium speech. However, they were disappointed as Powell reiterated much of what has been said over the last few months; the Fed will continue to watch incoming data and balance the risk of higher inflation with the risk of a larger slowdown caused by their aggressive tightening policy. Still, the Chairman solidified that it is very unlikely the Fed will cut rates this year.
Beneath the surface, mega caps outperformed as the broader market stood still. Technology (+2.3%), Consumer Discretionary (+1.2%) led the gains while Energy (-1.4%) and Staples (-0.8%) were the biggest laggards.
Powell Makes Long-Awaited Jackson Hole Speech
Fed Chair Jerome Powell acknowledged that progress has been made, but inflation is still above where policymakers feel comfortable
A strong economy and decelerating inflation give the Fed room to "proceed carefully" at upcoming meetings
Powell called for more vigilance in the inflation fight and warned additional interest rate increases could be yet to come
The key takeaway - Jerome Powell is reiterating the message that the Fed is stepping into a more gradual approach to policymaking that is focused on balancing the risk of elevated inflation and the possibility of overtightening leading to an economic downturn. Some key points were made such as Powell not entertaining the recent speculation of a 3% inflation target change. He stood strong that 2% is their target and the central bank will not call the job done until that is reached or that inflation is materially heading back to target. This likely means that rate cuts are out of the equation for the rest of the year and into 2024. Another one or two rate hikes cannot be ruled out, but as Powell said, this will depend on incoming data out of the labor market and inflation. Markets digested the news by selling off before eventually rebounding to end a volatile two days of trading.
The US Economy is Actually Slowing Down, Not Speeding Up, These S&P Surveys Shows
The S&P Global flash U.S. services-sector index fell to a six-month low of 51 in August from 52.3 in the prior month
The S&P U.S. manufacturing-sector index, meanwhile, slipped to 47 from 49 and remained in negative territory
New orders, a sign of future demand, fell for the first time in six months
Companies felt more pressure from rising labor costs and higher prices for some raw materials
The key takeaway - While the manufacturing sector remains in a prolonged downturn, the services sector, which constitutes the majority of economic activity in the US, has shouldered the responsibility of driving the economy. Following the pandemic, consumers escalated their spending on these services, such as travel, as demand pent up during lockdowns was finally unleashed. The S&P's survey, coupled with other recent data, suggests a deceleration in the momentum of the services sector. Faltering consumer demand in this segment of the market would produce a material drag on future economic growth, but additional data is needed to validate this trend.
Home Sales Fall Again in July, As Supply Drops to Near Quarter-Century Low - Jeffry Bartash - MarketWatch
Sales of previously owned homes dropped 2.2% in July to an annualized rate of 4.07 million units
Sales were 16.6% lower compared with July of last year. Homes sold at the slowest July pace since 2010
There were 1.11 million homes for sale at the end of July, 14.6% fewer than July 2022 and the lowest level since 1999
At the current sales pace, that represents a 3.3-month supply. A six-month supply is considered balanced
The key takeaway - The ongoing downturn in the existing home continues as seemingly ever-increasing mortgage rates exert pressure on both buyers and sellers. Buyers have scaled back their demand for houses due to home affordability becoming less realistic as borrowing costs rise. The scarce inventory prevents prices from moderating to balance higher borrowing costs and spur demand, given that current homeowners are reluctant to sell their properties and face those higher rates themselves. This dynamic produces the stagnant market of today characterized by diminished transaction volume. New home builders are stepping in to alleviate this pressure and provide fresh supply to the housing market.
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