Holbrook Insights

Weekly Market Update - November 14, 2022

The Consumer Price Index (CPI) surprised markets last week with headline—which rose 0.4 percent month-over-month against an expected 0.6 percent gain—and core— which rose 0.3 percent month-over-month (excluding food and energy) against an expected 0.5 percent gain—numbers. These results were driven by a decline in prices for used vehicles, commodities, and medical care. The bond market rallied heavily on the news. The 2-year, 5-year, 10-year, and 30-year fell 24 basis points (bps) (to 4.42 percent),
33 bps (to 4 percent), 29 bps (to 3.87 percent), and 19 bps (to 4.06 percent), respectively.

Thursday saw the release of the CPI for October. Consumer prices increased less than expected, due in part to declining prices for consumer goods. Finally, Friday saw the release of the preliminary University of Michigan consumer sentiment report for November. Consumer sentiment fell more than expected during the month, as consumer views on current economic conditions soured to start November.

Weekly Market Update- November 07, 2022

Last week’s data focused on the health of the manufacturing and services segment of the economy. The week also wrapped with the October employment report. But the most important news was the FOMC decision on Wednesday.

  • Wednesday brought the Federal Open Market Committee (FOMC)’s latest rate decision where it hiked the policy rate by 75 basis points (bps) for the fourth consecutive time. This brought the upper target of the central bank’s rate up to 4 percent for the first time since January of 2008 during the global financial crisis. As for the future path of the central bank’s policy rate, Federal Reserve (Fed) Chair Powell left room for flexibility but indicated that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” While this might hint at a transition to a smaller rate hike in December, Powell went on to reiterate the “higher for longer” narrative that’s been developing, saying, “We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

Weekly Market Update- October 31, 2022

Last week’s data provided insight in to the health of both the consumer and the overall economy. Tuesday saw the release of the Conference Board Consumer Confidence Index for September. Consumer confidence declined by more than expected during the month, breaking a streak of two consecutive months with rising confidence.

 

Equity markets moved higher despite a rough week of earnings for a number of FAANG names. Meta Platforms (META), Amazon (AMZN), and Alphabet (GOOGL) all reported earnings and sold off to various degrees despite mixed results. The worst of the three was Metaverse (META), which was down 23.7 percent, with the stock missing operating profit expectations as it continues to invest heavily into building out its alternative and virtual reality platforms. The company remains in a very difficult and costly transitional phase from traditional social media to this new, interactive environment. Amazon also reported and, while the numbers came in a bit light, the biggest news was softer fourth-quarter/holiday season sales guidance—down roughly 7 percent on the consumer side—and lower Amazon Web Services profitability—down 13.3 percent.  

Weekly Market Update- October 17, 2022

The front end of the yield curve continued its rise last week, lifted by hotter-than-expected inflationary data.The inversion between the 2- and 10-year U.S.Treasury yields expanded to 50 basis points (bps) and the spread picked up another 8 bps between the two yields. The inversion reflects the Federal Reserve (Fed)’s efforts to cool near-term demand and the economy by raising the shorter-term debt beyond longer-dated debt. The 2-, 5-, 10-,and 30-year Treasuries moved 20 bps (to a 4.50 yield level), 13 bps (to a 4.27 yield level), 12 bps (to a 4.01 yield level), and 13 bps (to a 3.98 yield level), respectively.

Thursday and Friday saw the release of September retail sales and the preliminary estimate for the October University of Michigan consumer sentiment report. Headline retail sales were unchanged following an upwardly revised 0.4 percent increase in August. Core sales increased modestly as consumers slowed their purchases of larger discretionary items. Consumer sentiment improved more than expected, as improving consumer views on current economic condition supported improvement for the index. Future expectations soured, driven by rising expectations for short- and long-term inflation.

Weekly Market Update- October 10, 2022

The September employment report showed 263,000 jobs added during the month, which helped drive the unemployment rate down to 3.5 percent. This development further supports the Federal Reserve (Fed)’s trend of outsized interest rate hikes, as a higher unemployment rate is likely required to see meaningful cooling of inflation. As we approach the Fed’s November 1–2 meeting, the debate continues between those who think more must be done to fight stubbornly high inflation and those who think rates may be increasing too quickly for the economy to handle.

On Friday, the much-anticipated (and better-than-expected) employment report for September was released, which showed 263,000 non-farm payrolls added versus 255,000 expected. The unemployment rate fell from 3.7 percent to 3.5 percent, leading to a sell-off in bonds and equities as it provided additional runway for continued rate
hikes from the Fed.

Weekly Market Update- October 3, 2022

Equity sold off again last week, marking it the sixth week in the last seven to post a loss. The catalyst in aggressive Fed tightening remained in place as the sell-off that has persisted over the last month. The S&P 500 fell by 9.34 percent in September as the FOMC hiked another 75 bps, marking the third straight hike of this magnitude. Additionally, the FOMC moved up its rate expectations for 2023, which are now closer to 4.5 percent. The federal funds rate currently sits between 3.00 percent and 3.25 percent, indicating that the FOMC expects to continue to hike in upcoming meetings.

Chicago Fed President Charles Evans was apprehensive about the pace, saying, “There are lags in monetary policy and we have moved expeditiously. We have done three 75 basis point (bp) increases in a row and there is talk of more to get to that 4.25 percent to 4.5 percent by the end of the year. You’re not leaving much time to sort of look at each monthly release.” The U.S. Treasury yield curve shifted moderately last week. The 2-year, 5-year, and 10-year fell 18 bps (to 4.16 percent), 23 bps (to 3.96 percent), and 1 bp (to 3.71 percent), respectively. The 30-year gained 2 bps (to 3.66 percent).

Weekly Market Update- September 26, 2022

The equity market continued to feel pain as the Fed remains steadfast in its efforts to fight inflation. In his eight-minute speech last month, Chair Powell highlighted that there may be some short-term and this is what we’ve seen in the markets the last two weeks—particularly in small- caps and growth stocks since they are more susceptible to higher rates as higher costs of doing business lead to compression in valuations and future growth potential. Equity investors flocked to save haven areas in consumer staples, utilities, and health care as cyclical growth stories in energy, consumer discretionary, and REITs came under heavy selling.

Friday saw the release of the PMI for services, manufacturing, and the S&P Global U.S. Composite. The services PMI increased to 49.2 from 43.7, leaving the survey still in the contractionary camp below 50 but better than July. The manufacturing PMI moved up slightly to 51.8, from 51.5 in the prior month. Lastly, the S&P Global U.S. Composite came in at 49.3, up from 44.6 in August. The data shows an economy still facing headwinds in conditions but potentially easing for the month of September.

Weekly Market Update- September 19, 2022

The market sold off heavily again last week as short-term borrowing rates increased when the August CPI came in higher than expected. As a result, the Fed has more work to do in terms of raising rates and cooling off consumer demand to drive inflation lower. Short-term rates also dramatically reacted to this data. Additionally, it was announced on Thursday that FedEx, one of the largest international shippers, pulled its guidance for next year amid lower shipment volumes and overall economic uncertainty. The worst-performing sectors—which put a premium on lower rates of borrowing to fuel future growth—were technology, communication services, industrials, and consumer discretionary. The sectors that held up best amid the sell-off were energy, utilities, materials, and real estate.

Wednesday saw the release of the August Producer Price Index (PPI) report. This index, which measures the prices received at the wholesale level, decreased 0.1 percent on a headline basis, aligning with economist expectations. Stripping out more volatile food and energy prices, core producer prices increased 0.2 percent. Year-over-year, headline producer prices rose 8.7 percent. Although that number seems quite high, it represents a significant retreat from the 9.8 percent year-over-year increase measured in July. Although the PPI is sometimes considered a leading indicator of what is to come for the CPI, it’s important to remember that services are a large component of consumer prices and are not factored into the physical goods that make up the PPI. Regardless, the Fed will look for meaningful decreases in both indices before it considers any sort of monetary policy pivot.

Weekly Market Update- September 12, 2022

The market rallied last week after falling in each of the previous three weeks. Economic news remains robust, leading investors to believe a 75 bps increase to the federal funds rate is increasingly likely at this month’s meeting. Due to this thinking, investors entered the market as a faster increase in rates from the Fed could potentially mean hitting the target sooner and cooling off inflation. Inflation linked sectors understandably struggled, with energy and consumer staples being the two worst-performing sectors.

As the Federal Open Market Committee (FOMC) enters its quiet period leading up to the September 20–21 meeting, market participants are under the impression that the most likely outcome will be a 75 basis point (bp) hike in the Federal Reserve (Fed)’s policy rate. Fed Chair Jerome Powell seemed to support that expectation in an appearance last Thursday when he reiterated his hawkish stance and gave no indication that such expectations were unreasonable. “It is very much our view, and my view, that we need to act now forthrightly, strongly, as we have been doing, and we need to keep at it until the job is done.”

Weekly Market Update- September 06, 2022

The markets sold off again last week as they continue to give up post-June rally gains following a reiteration of tighter policy from the Fed. Global central banks echoed this sentiment with the European Central Bank widely expected to hike 75 bps this week. The continued tightening by developed market central banks has led to concerns around overall global growth. As a result, markets maintained their recent risk with utilities, health care, communication services, and consumer staples as the top-performing sectors last week. Materials, technology, and REITS underperformed, and semiconductors sold off as the U.S. announced a ban of advanced AI chips to China. Nvidia (NVDA) was hit hard—selling off more than16 percent—and American Micro Devices (AMD) fell more than 12 percent. Walmart (WMT), Target (TGT), and Dollar General (DG) outperformed while health care names such as McKesson (MCK), Abbott Labs (ABT), and Cardinal Health (CAH) also fared well. 

Friday saw the release of the August employment report, which showed that 315,000 jobs were added during the month, better than the 298,000 expected by economists. This represents a strong month of job growth on a historical basis and likely supports Fed plans for tighter monetary policy at its September meeting. Although the unemployment rate rose from 3.5 percent to 3.7 percent during the month, it was largely due to an influx of workers returning to the labor market, which is a positive development. This was another strong employment report that showcased the strength of the labor market.