Weekly Market Update – August 11, 2023

Quick Takes

• Inflation data sent mixed signals, with the Consumer Prices Index (CPI) showing tepid consumer inflation, while the Producer Price Index (PPI) came in higher than economists forecasted, and finally, data from the University of Michigan showed that consumer expectations for inflation had eased.
• The 2023 global stock rally stalled in August as most major stock indices dropped for the second consecutive week. The S&P 500 slipped -0.3% for the week, the small-cap Russell 2000 fell -1.7%, and the Nasdaq Composite led the way down with a -1.9% decline.
• The benchmark 10-year U.S. Treasury yield has also risen for four straight weeks, rising +12 basis points (bps) to end the week at 4.15%, while the 2-year Treasury yield was up +13 bps to 4.89%. The Bloomberg U.S. Aggregate Bond Index fell -0.6% for the second week in a row.

Stocks post second week of declines, Treasury yields rise

The 2023 global stock rally has stalled in August as most major stock indices dropped for the second consecutive week. In the U.S. mixed signals on inflation had investors second guessing their risk appetites. Stocks were up for the week on Thursday morning after the Consumer Prices Index (CPI) showed tepid consumer inflation. But just a day later and the Producer Price Index (PPI) complicated the inflation picture, showing wholesale prices ticking up from June’s flat reading and higher than economists forecasted. Then later Friday morning the University of Michigan Consumer Sentiment survey showed that consumer expectations for inflation had eased. Investors are watching inflation closely for any signs of reacceleration that could encourage the Fed to raise interest rates further. Energy prices have been moving higher contributing to the bump up in the PPI. Crude oil has risen for seven straight weeks, the longest streak since June 2022. That helped the S&P 500 Energy sector to the best performance of the 11 main sectors. Still, the overall picture points to a slowdown in inflation.

Overall, among the major U.S. indices the Nasdaq Composite led the way down for the second week with a -1.9% decline following the prior week’s -2.9% drop—its first two-week losing streak of the year and the biggest back-to-back weekly loss since December. The Nasdaq’s two-week slump is primarily due to its nearly 50% weight in the Technology sector. The S&P 500 Technology sector has been the worst performing sector the last two week, declining -2.9% last week and -4.1% the prior week—but remains up +35.6% for the year. The small cap Russell 2000 Index also struggled last week, falling -1.7%. The headline S&P 500 Index slipped -0.3%, an improvement from the prior week’s -2.3% drop. Non-U.S. stocks also fell for the second straight week with the developed market international stocks (as measured by the MSCI EAFE Index) down -0.7% and the MSCI Emerging Markets Index down -2.0%, following a -2.4% drop for each index the prior week. The U.S. Dollar Index has been positive for four straight weeks, providing an additional headwind of non-U.S. assets.

The benchmark 10-year U.S. Treasury yield has also risen for four straight weeks. The hotter-than-expected PPI report on Friday pushed Treasury yields higher to close the week with the 10-year yield up +12 basis points (bps) to end the week at 4.15%. The 2-year U.S. Treasury yield was up +13 bps to 4.89%. In a noteworthy divergence last week, the 30-year U.S. Treasury yield, was up just +6 bps. Earlier this month, the Treasury Department increased the estimated amount of debt it would have to issue during the second half of the year. Since then, investors have been more reluctant to bid for longer-dated bonds at auction. In the end, the Bloomberg U.S. Aggregate Bond Index fell -0.6% for the second week in a row, while non-U.S. bonds slipped a bit more with the Bloomberg Global Aggregate ex U.S. Bond Index falling -0.9%.

Chart of the Week

Trade Deficit Narrows as Imports Fall to Lowest Since 2021

U.S. international trade in goods and services

Note: Seasonally adjusted.
Source: Commerce Department, The Wall Street Journal.

Economic Review

•  The Consumer Price Index (CPI) rose +0.2% in the month of July, in line with expectations and last month’s unrevised level. That’s the smallest back-to-back monthly readings in over two years. Year-over-year (YoY), consumer prices were up +3.2%, slightly below expectations for +3.3% but above last month’s unrevised +3.0%. The annual headline inflation reading has eased from a peak of 9.1% in June 2022, but July was the first annual increase in 13 months. Core CPI, which excludes the more volatile food and energy prices, was also up +0.2% for the month, in line with expectations and June’s reading. Core CPI was up +4.7% YoY, also in line with expectations and down a tick from June’s +4.8% level. More than 90% of the increase in consumer prices was tied to shelter — rent and housing prices. Rents rose +0.4% and they are up 8% in the past year. Auto insurance also rose sharply for the second month in a row. Airfares sank -8% for the second month in a row. Used-vehicle prices, a big contributor to the runup in inflation, fell -1.3%. Medical-care costs also declined. Overall, the headline and Core CPI were in line with expectations and items ex-shelter were up just +0.1% YoY which should be enough to keep the Fed from hiking further at the next meeting in September. Indeed, the odds of the Federal Reserve leaving its current policy rate unchanged rose after the July release.
• The Producer Price Index (PPI) reaccelerated in July, rising +0.3%, above expectations of +0.2% and up from the prior month’s negatively revised 0.0% (down from +0.1%). Services prices rose +0.5% from June, the biggest monthly increase since August 2022. Year-over-year (YoY) PPI rose +0.8%, higher than the expected +0.7% and up from last month’s positively revised +0.2% (originally +0.1%). Core PPI, which strips out volatile food and energy costs, was up +0.3% for the month, above expectations of +0.2% and the prior month’s unrevised +0.1%. Year-over-year, Core PPI was unchanged at +2.4%, above expectations of +2.3%. Wholesale prices have decelerated even faster this year than consumer prices, which may just lead inflation down faster than the Fed expected.
• U.S. Consumer Credit rose $17.8 billion in June from a positively revised $9.5 billion gain in the prior month (initially reported at $7.2billion). Results were higher than Wall Street expectation for a rise of $13 billion. Growth for revolving credit, such as credit cards, actually slipped $0.6 billion after last month’s $8.5 billion increase. It was the first decline in revolving credit since April 2021. Nonrevolving credit, which includes auto and school loans, was up sharply, rising +6%, or 18.5 billion, following the prior month’s $1.0 billion increase. Nonrevolving credit is usually much less volatile the revolving credit.  The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt.
• The preliminary August report of the University of Michigan Consumer Sentiment Index slipped slightly to 71.2 after hitting a 22-month high of 71.6 the prior month, but in line with expectations. It is the largest jump since December 2005. The Current Economic Conditions component improved to 77.4 from 76.6 the prior month. The Consumer Expectations component slipped to 67.3 from 68.3. One-year inflation expectations fell to +3.3% from +3.4%. The five-year inflation expectations also fell a tick to +2.9% from +3.0% the prior month which is what Wall Street expected for August. “In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago,” said Joanne Hsu, the director of University of Michigan consumer surveys.
• The Small Business Optimism Index rose again in July but remains below the long-term average, as inflation and labor concerns continue to weigh on owners. The National Federation of Independent Business (NFIB) reported that business optimism rose to 91.9 in July from 91.0 in June. That is its highest level since November 2022 and beat expectations for 91.3 but remains below the 49-year average of 98. Inflation is back at the top as the single biggest concern among owners, with 21% reporting each as their single most important challenge. Many business owners also reported Current Job Openings were hard to fill. Breadth was mixed, with four components increasing, four flat, and two declining. The number of owners that Expect the Economy to Improve over the next six months improved by +10 percentage points to a net negative -30% in July, the highest reading in nearly two years but still very low compared with the historical average.
• The weekly MBA Mortgage Application Index fell -3.1% for the week ended August 4, following the prior week’s -3.0% drop. The Purchase Index fell -2.7% following a -3.2% drop the prior week and the Refinance Index dipped -4.0% following a -2.5% slide the prior week. The average 30-Year Mortgage Rate rose for the third straight week, up +16 basis points to 7.09%, which is +1.62 percentage points higher from a year earlier.

The Week Ahead

The week’s economic releases are all sandwiched between Tuesday and Thursday. On Tuesday, July Retail Sales will kick off the week and provide some indication if consumers are still spending. On Wednesday, the Federal Open Market Committee will release the minutes from its late-July monetary-policy meeting, in which they raised interest rate by 25 basis points. On Thursday, the Conference Board will release its leading economic index for July. Wall Street is expecting a -0.3% month-over-month decline which would be the 15th straight monthly decline. Earnings season slows considerably next week and will be heavy on retailers with Home Depot starting off on Tuesday, followed by Target and TJX on Wednesday. Ross Stores, Tapestry, and Walmart will report on Thursday. Other earnings reports during the week include Agilent Technologies, Cardinal Health, Cisco Systems, Applied Materials, Deere, and Palo Alto Networks.

Did You Know?

DIET COLA – The Social Security Cost-of-Living-Adjustment (COLA) is expected to rise in 2024, but not by a lot. Social Security recipients are likely to get a significantly smaller raise in 2024 because of a slowdown in inflation. If inflation rises in line with its recent trend over the next two months, the COLA should rise by about +3% next year. The COLA increase was +8.7% in 2023 as inflation soared (Source: The Wall Street Journal).

CHARGE IT – According to the New York Fed’s Quarterly Report on Household Debt and Credit, credit card debt balances have topped $1 trillion, a new record that reflects rising consumer spending alongside elevated inflation. The less reported milestone that also occurred; there is a record $3.5 trillion of untapped credit card debt. So less than 30% of the available credit card debt available has been tapped. Hopefully Americans can remain disciplined in their credit card usage as the interest on credit card debt also enters record territory exceeding 20% (Source: Seeking Alpha, The Kobeissi Letter).

DINE AND DASH – The share of orders at U.S. fast-food chains that diners ate in a restaurant were just 14% in the first five months of this year, according to market-research firm Circana. Some chains are now developing new restaurants centered on drive-throughs and carryout, with very little or no dine-in option. For people who still want to enjoy their burger and fries in an eatery, know that fast-food restaurants aren’t nixing dining rooms completely (Source: Circana, The Wall Street Journal).

This Week in History

INTERNET STOCK INCEPTION – On August 9, 1995, the internet stock sector was born with a bang as 16-month-old Netscape Communications went public on the Nasdaq after selling stock at $28 a share. Lead underwriter Morgan Stanley had to raise the stock’s opening price to $71 before trading could begin (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.