EQUITIES CONTINUE THEIR AUGUST RETREAT AS TREASURIES JUMP AND WORRIES OF A SOFT-FED-LANDING DIMINISH

Weekly Market Update — August 19, 2023

• It was a rough week for Wall Street, with the four major U.S. equity indices all losing more than 2% and the smaller-cap Russell 2000 losing 3.4%
• Inflation and rising rates were a major factor, helping push the tech-laden NASDAQ to a 2.6% loss, followed by the mega-cap DJIA (-2.2%) and the large-cap S&P 500 (-2.1%)
• By many accounts it was the movement in Treasuries that spurred on the selling in equities, as the 10-year Treasury hit its highest level since November 2007 when it closed Thursday at 4.31% before settling back to 4.25%
• Volatility was muted and trended down on the week as Wall Street’s trading volume was light, as is typical for the summer
• Wall Street tried to parse through the minutes of the Fed’s latest meeting and the consensus conclusion was that most of the Fed members continue to see inflation risks which might result in another rate hike
• China was also in the news as there was a lot of not-so-good economic news from that region, including that property developer Evergrande filed for Chapter 15 bankruptcy protection
• WTC Crude oil trended down this week, losing about 1% and coming to rest at $81.40/barrel

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Stocks & Equities Lose Momentum as Treasuries Rise 

Stocks were down across the board, as Wall Street worries that a jump in Treasuries does not bode well for equities. Each of the major U.S. equity markets lost more than 2%, with smaller-caps hit even harder as the Russell 2000 dropped more than 3%. The technology names and the smaller-caps were traded the most, but volumes were still light and surprisingly Growth names held up better than Value names.

Despite the heat gripping most of the country, markets have cooled decidedly in the most recent weeks, with the S&P 500 down about 5% just in August. The bright-side is that markets were up almost 20% from mid-March until early August, but still.

Mid-week, the Federal Reserve released the minutes from its July policy meeting and the consensus was that the Fed was still worried about inflation and recent growth and might need to tamp down with another rate hike this year.

There was a decent amount of economic data this week, including that:

• Total retail sales increased 0.7% month-over-month in July following an upwardly revised 0.3% increase in June
• Excluding autos, retail sales were up 1.0% month-over-month after increasing an unrevised 0.2% in June
• Total housing starts increased 3.9% month-over-month in July to a seasonally adjusted annual rate of 1.452 million units
• Building permits increased 0.1% month-over-month to a seasonally adjusted annual rate of 1.442 million

• Total industrial production increased 1.0% month-over-month in July following a downwardly revised 0.8% decline in June
• The capacity utilization rate jumped to 79.3% from a downwardly revised 78.6% in June
• Total industrial production was down 0.2% year-over-year
• The capacity utilization rate of 79.3% was 0.4% below its long-run average

• Initial jobless claims for the week ending August 12th decreased by 11,000 to 239,000
• Continuing jobless claims for the week ending August 5th increased by 32,000 to 1.716 million
• The four-week moving average for initial claims increased by 2,750 to 234,250
• The four-week moving average for continuing claims decreased by 8,250 to 1,692,750

U.S. Retail and Food Services Sales Advance in July

On Tuesday, it was announced that the advance estimates of U.S. retail and food services sales for July 2023 were $696.4 billion, up 0.7% from the previous month, and up 3.2% above July 2022. In addition, total sales for the May 2023 through July 2023 period were up 2.3% from the same period a year ago.

Further

• Retail trade sales were up 0.6% from June 2023, and up 2.0% above last year.
• Nonstore retailers were up 10.3% from last year.
• Food services and drinking places were up 11.9% from July 2022.

Leading Indicators Decline Again, Down for the 16th Month in a Row

On Thursday, it was announced that the Conference Board Leading Economic Index for the U.S. declined by 0.4% in July 2023 to 105.8 (2016=100), following a decline of 0.7% in June. The LEI is down 4.0% over the six-month period between January and July 2023 – a slight deterioration from its 3.7% contraction over the previous six months (July 2022 to January 2023).

“The US LEI – which tracks where the economy is heading – fell for the sixteenth consecutive month in July, signaling the outlook remains highly uncertain. On the other hand, the coincident index (CEI) – which tracks where economic activity stands right now – has continued to grow slowly but inconsistently, with three of the past six months not changing and the rest increasing. As such, the CEI is signaling that we are currently still in a favorable growth environment. However, in July, weak new orders, high interest rates, a dip in consumer perceptions of the outlook for business conditions, and decreasing hours worked in manufacturing fueled the leading indicator’s 0.4 percent decline. The leading index continues to suggest that economic activity is likely to decelerate and descend into mild contraction in the months ahead. The Conference Board now forecasts a short and shallow recession in the Q4 2023 to Q1 2024 timespan.”

• The Conference Board Coincident Economic Index for the U.S. improved by 0.4% in July 2023 to 110.5 (2016=100), after no change in June. The CEI is now up 0.7% over the six-month period between January and July 2023 – down slightly from the 0.9% growth rate recorded over the previous six months.
• The Conference Board Lagging Economic Index for the U.S. was unchanged in both July and June of 2023, at 118.3 (2016 = 100). The LAG is up slightly by 0.1% over the six-month period from January and July 2023, down dramatically from its 2.5% growth over the previous six months.

The US LEI continues to signal a recession ahead

Imports Up in July Too

Also on Tuesday, the U.S. Bureau of Labor Statistics reported that prices for U.S. imports advanced 0.4% in July, only the second monthly advance in 2023 and following a 0.1% decline the previous month. The July increase was driven by higher fuel prices. In addition, U.S. export prices rose 0.7% in July, after decreasing 0.7% in June.

Despite the July rise, U.S. import prices declined 4.4% over the past 12 months, after increasing 8.8% from July 2021 to July 2022.

Fuel Imports: Import fuel prices advanced 3.6% in July, after increasing 1.9% in June. Higher prices for petroleum and natural gas in July contributed to the rise. Despite the advances the past 2 months, import fuel prices decreased 29.0% over the past year. Prices for import petroleum rose 3.5% in July following a 2.1% increase the previous month. Petroleum prices last advanced in consecutive months in June 2022. Prices for import petroleum fell 28.2% for the year ended in July. The price index for natural gas rose for the first time since January 2023, increasing 12.1%, after a 1.5% drop in June. The July advance was the largest rise since the index advanced 68.4% in December 2022. Import natural gas prices declined 58.8% over the past 12 months, less than the record 70.7% over-the-year decrease in June.

All Imports Excluding Fuel: Nonfuel import prices were unchanged in July following a 0.3% decrease the previous month. Lower prices in July for nonfuel industrial supplies and materials and consumer goods offset higher prices for foods, feeds, and beverages; automotive vehicles; and capital goods. Nonfuel import prices declined 0.9% from July 2022 to July 2023.

Foods, Feeds, and Beverages: Import prices for foods, feeds, and beverages advanced 2.5% in July, after edging down 0.1% in June. Higher prices for fruit, vegetables, and meat all contributed to the increase in July.

Finished Goods: Prices for the major finished goods import categories were mixed in July. Automotive vehicles prices rose 0.3% following a 0.1% drop the previous month. The July advance was driven by higher prices for both passenger cars and vehicles designed to transport goods. Capital goods prices ticked up 0.1% in July, after edging down 0.1% in June. The increase was led by higher prices in July for civilian aircraft, engines, and parts. In contrast, consumer goods prices fell 0.1% in July, after declining 0.2% in June. The decrease in July was driven by lower prices for nonmanufactured consumer goods.

census.gov ; bls.gov ; conference-board.org; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com; bls.gov