EQUITIES RETREAT AS OIL JUMPS FOR THE SECOND WEEK IN A ROW AND MORTGAGE-DEMAND HITS A 28-YEAR LOW

Weekly Equities Market Update — September 9, 2023

• It was only a four-day trading week given that markets were closed Monday, but all the major U.S. equity markets retreated despite posting a positive day on Friday
• As has been the case the past few weeks, the smaller-cap Russell 2000 was out ahead of the other markets – but not in a good way – as it declined 3.6% versus NASDAQ (-1.9%), the S&P 500 (-1.3%) and the mega-cap DJIA (-0.7%)
• Interestingly, the 3.6% gain for the smaller-cap Russell 2000 was the mirror-image of the week before, when it gained 3.6%
• Apple was a big mover on the week and its 6% drop seemed to cast a shadow over markets all week
• The price of oil is beginning to once again raise inflation worries, after last week’s big 8% jump and then another 2.2% jump this week to end the week at $87.47/barrel
• Much of oil’s gains can be attributed to Saudi Arabia and Russia extending their oil production cuts through the end of 2023
• Of the 11 S&P 500 sectors, only two advanced, as Energy (+1.4%) and Utilities (+0.3%) outperformed
• Of the 9 sectors that were negative, three declined more than 2% as the Industrials (-2.9%), Information Technology (-2.3%), and Materials (-2.5%) sectors underperformed
• The ISM Services PMI moved up in August, with prices increasing faster than expected, adding to worries that the Fed will need to raise rates to fight inflation
• There were other economic data sets received this week too, some of them stoking inflation fears, including that Initial jobless claims were 216,000 – the lowest since February – and unit labor costs were revised significantly higher
• In Treasury news, the 2-year Treasury yield rose to 4.97% after having crested 5.00% and the 10-year Treasury rose to 4.26%

*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 Retreat As Treasury Yields Rise

Equities retreated over the holiday-shortened week as generally positive economic data sets drove an increase in rates. But despite yields advancing, on the week Growth stocks outperformed Value, the Large-Caps outperformed the Small-Caps and the Mega-Caps outperformed the Large-Caps.

And while one stock does not dictate markets, interestingly it did feel like Apple, which is the most heavily weighted stock in the S&P 500 Index, did impact the overall market. Apple tumbled about 6% on the week after reports that China would no longer allow its government employees to use iPhones. Wall Street was trying to unpack this development as Apple seems to have a good relationship with the Chinese government and Wall Street was trying to figure out the implications for companies that don’t have such a relationship with the Chinese government.

The week’s economic calendar was all over the board, with most maybe surprising on the upside. The big negative was the Institute for Supply Management’s report on August services sector activity, which advanced to its highest level since February. And buried deeper in the report were that new orders were growing at a faster pace and inventories had risen significantly. Both of these developments support the case that the Fed is not done raising short-term rates.

In addition to the ISM’s Report and jobless claims, there was a lot more economic data to digest this week, including that:

• In June, consumer credit increased at an annual rate of 4.3%
• Revolving credit decreased by $0.6 billion in June to $1.262 trillion
• Nonrevolving credit increased by $18.4 billion to $3.735 trillion
• Consumer credit increased at a seasonally adjusted annual rate of 4.0% during the second quarter
• Revolving credit increased at an annual rate of 7.1%, while nonrevolving credit increased at an annual rate of 3.0%

• The revised Q2 productivity report featured a downward revision in productivity to 3.5% and an upward revision in unit labor costs to 2.2%
• Output increased 1.9% and hours worked decreased 1.5%
• That was the first decline in hours worked since the second quarter of 2020 and was the result of a 1.5% decline in average weekly hours

• The U.S. trade deficit widened to $65.0 billion in July
• Exports were $3.9 billion more than June exports, and imports were $5.2 billion more than June imports
• The goods deficit with China increased $1.2 billion to $24.0 billion in July
• The real deficit widened to $88.4 billion in July from $85.8 billion in June, which is 3.6% less than the Q2 average

Mortgage Demand Hits Lowest Level in 28 Years

On Wednesday it was announced that mortgage applications decreased 2.9% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending September 1, 2023.

In addition:

• On an unadjusted basis, the Index decreased 5% compared with the previous week.
• The Refinance Index decreased 5% from the previous week and was 30% lower than the same week one year ago.
• The seasonally adjusted Purchase Index decreased 2% from one week earlier. The unadjusted Purchase Index decreased 5% compared with the previous week and was 28% lower than the same week one year ago.

“Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates. Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates.”

A Harbinger of Things to Come?

• The refinance share of mortgage activity decreased to 30.0% of total applications from 30.1% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 6.7% of total applications. The FHA share of total applications increased to 13.7% from 13.2% the week prior. The VA share of total applications decreased to 11.3% from 11.6% the week prior.
• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 7.21% from 7.31%, with points decreasing to 0.69 from 0.73 (including the origination fee) for 80% loan-to-value ratio (LTV) loans. The effective rate decreased from last week.
• The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $726,200) decreased to 7.21% from 7.28%, with points increasing to 0.76 from 0.66 (including the origination fee) for 80% LTV loans. The effective rate decreased from last week.
• The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 7.03% from 7.10%, with points decreasing to 0.95 from 1.09 (including the origination fee) for 80% LTV loans. The effective rate decreased from last week.
• The average contract interest rate for 15-year fixed-rate mortgages decreased to 6.66% from 6.72%, with points decreasing to 0.86 from 1.11 (including the origination fee) for 80% LTV loans. The effective rate decreased from last week.
• The average contract interest rate for 5/1 ARMs decreased to 6.33% from 6.48%, with points decreasing to 1.11 from 1.20 (including the origination fee) for 80% LTV loans. The effective rate decreased from last week.

Goods and Services Deficit Rises

On Wednesday, the U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced that the goods and services deficit was $65.0 billion in July, up $1.3 billion from $63.7 billion in June.

Exports, Imports, and Balance

• July exports were $251.7 billion, $3.9 billion more than June exports.
• July imports were $316.7 billion, $5.2 billion more than June imports.
• The July increase in the goods and services deficit reflected an increase in the goods deficit of $2.0 billion to $90.0 billion and an increase in the services surplus of $0.7 billion to $25.0 billion.
• Year-to-date, the goods and services deficit decreased $128.3 billion, or 21.4%, from the same period in 2022. Exports increased $27.3 billion or 1.6%.
• Imports decreased $101.0 billion or 4.3%

Goods by Selected Countries and Areas:

The July figures show surpluses, in billions of dollars, with Netherlands ($4.5), South and Central America ($4.1), Hong Kong ($1.5), Belgium ($1.5), Australia ($1.5), United Kingdom ($0.5), Brazil ($0.3), and Singapore ($0.2). Deficits were recorded, in billions of dollars, with China ($24.0), European Union ($17.3), Mexico ($12.8), Vietnam ($9.3), Germany ($7.2), Ireland ($6.5), Japan ($5.9), South Korea ($5.3), Italy ($4.1), Canada ($4.0), Taiwan ($3.9), India ($3.0), Malaysia ($2.4), Switzerland ($1.9), Israel ($0.8), France ($0.4), and Saudi Arabia ($0.2).

• The deficit with China increased $1.2 billion to $24.0 billion in July. Exports increased $0.4 billion to $11.1 billion and imports increased $1.6 billion to $35.1 billion.
• The surplus with Hong Kong decreased $1.0 billion to $1.5 billion in July. Exports decreased $0.9 billion to $1.9 billion and imports increased $0.1 billion to $0.4 billion.
• The balance with the United Kingdom shifted from a deficit of $0.8 billion in June to a surplus of $0.5 billion in July. Exports increased $1.0 billion to $5.8 billion and imports decreased $0.2 billion to $5.4 billion.

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