S&P 500: -2.39% DOW: -1.61% NASDAQ: -3.16% 10-YR Yield: 4.92%
What Happened?
The bears were on the hunt, and as a result, equity markets experienced one of their worst-performing weeks of the year. Several key factors contributed to this decline, with the most significant being the dramatic surge in yields. Strong economic data raised concerns about inflation, while anxieties regarding the conflict in the Middle East and technical dynamics surrounding treasury auctions added further upward pressure on interest rates. As bond yields increase, stock values are generally repriced, often lower, to account for its effects. Additionally, stock prices fall as investors shift from equity positions towards bonds at these new, higher levels of return. This combination, coupled with underwhelming earnings results from some of the largest companies in the indexes, resulted in a challenging week for stock investors.
Beneath the surface, only two sectors of the S&P 500 survived the onslaught this week. Energy (+0.8%) rose on higher prices in the oil market while the defensive Staples (+0.7%) sector followed closely behind. Highly economic and interest rate sensitive sectors suffered the most with Real Estate (-4.6%), Discretionary (-4.6%),and Financials (-3.0%) sinking the furthest.
Powell: Strong Economy May Need More Restraint, But Bond Markets Are Helping
Fed Chair Jerome Powell spoke at the Economic Club of New York Thursday, presenting remarks around monetary policy
The U.S. economy's strength and continued tight labor markets could require still tougher borrowing conditions to control inflation, said Powell
He appeared to align himself with recent commentary from his Fed colleagues that, "in principle", the recent rise was helping to tighten financial conditions and "at the margin" might lessen the need for more hikes
The key takeaway - In recent weeks, FOMC members have suggested that the rising yields in the fixed income market are exerting pressure on monetary conditions external to the Fed. Consequently, they believe there might be less need for as aggressive action than previously thought. This marked our first opportunity to hear Powell's remarks on this matter, and while he treaded lightly, he appeared to support this line of thinking. Markets, interpreting his stance as agreement, adjusted their expectations for future rate hikes accordingly. Odds of at least one rate hike left this year, which had recently exceeded 40%, now imply a less than one-in-three chance. When discussing the state of the economy, Powell maintained the view that inflation remains relatively high but highlighted promising data observed over the last few months. It's possible that we are at the conclusion of this rate-hiking cycle, and attention is now turning toward the path for the economy and estimating how long Fed policy might remain in a restrictive posture.
Retail Sales Rose 0.7% In September, Much Stronger Than Estimate
Retail sales rose 0.7% on the month, well above the 0.3% Dow Jones estimate. On a year-over-basis, sales rose 3.8%
Last night, the GOP nominated Jim Jordan
Sales at store retailers, gas stations, online retailers, motor vehicle dealers, and food services all rose strongly
Food services saw a 9.2% increase YoY, the highest among all categories
Only electronics/appliance stores and clothing retailers experienced a material decline
The key takeaway - The American consumer continues to best economists, consistently surpassing their expectations for modest growth with more robust performance. In the third quarter, all three retail sales reports exceeded estimates. Given that consumption constitutes a significant portion of economic activity, it appears that GDP growth for the quarter is poised to outperform experts' predictions at the start of July. The Federal Reserve is likely to interpret this report as an indication that there is more work to be done before the economy slows sufficiently to facilitate a return to target inflation. However, there are factors that could hinder consumer spending, as economists have anticipated for several months. Diminishing excess savings, rising credit card balances, and the resumption of student loan repayments could dampen Americans' willingness to spend.
US Home Sales Fell in September to the Lowest Level Since the Great Recession
Sales of previously owned homes fell by 2% to an annual rate of 3.96 million in September, said the National Association of Realtors
Compared to September 2022, home sales are down by 15.4%
The median price for an existing home rose for the third month in a row to $394,300
The total number of homes for sale in September fell by 8.1% from last year
The key takeaway - As interest rates have persistently marched higher over the past year and a half, they have left in their wake a battered housing market. The market is currently experiencing the lowest level of activity since 2010, coinciding with mortgage rates reaching 8%, a level not seen in decades. With borrowing costs at this elevated level, very few potential buyers are rushing to secure loans. Despite this intense decline in demand, the limited housing supply is providing support to prices, as buyers battle for the limited available homes. On a positive note, it appears that most of the negative impact has already been absorbed, as the Federal Reserve is expected to maintain or only slightly raise rates from here.
From Around the Watercooler
The House Speaker situation isn't any clearer after two votes failed to appoint Republican Rep. Jim Jordan of Ohio to the seat
Nokia is cutting up to 14,000 jobs as part of a plan to lower costs after profits sank 69% year over year in the third quarter
Tesla’s price cuts ate into profits as the electric vehicle-maker’s reported profits fell by 44% last quarter after several price reductions
Household wealth in the US surged during the pandemic, jumping 37% in the steepest climb ever seen in the Fed’s Survey of Consumer Finances
