Weekly Market Commentary: August 13-19, 2023
Fed hike remains on the horizon
The minutes from the last Federal Reserve meeting were released last week. They showed some Fed members were in favor of pausing rate hikes, but most were on the side of continuing to raise rates. The 10-year Treasury zoomed past 4.3%, and the markets sold off as a result. We haven’t seen the 10-year at these levels since 2007 — do you remember what happened then?
Bond investors have been selling, pushing rates higher and signaling an imminent recession with not a lot of future optimism. Thirty-year mortgage rates are over 7%, which isn’t going to help the housing market. While the rise in inflation has leveled off significantly from this time last year, the most recent inflation data shows it has flattened at an elevated level. None of this is what the Fed wants to see at this point.
The Fed’s Jackson Hole symposium is coming up this week and has previously been the venue for some notable policy announcements. Chairman Jerome Powell’s announcement at Jackson Hole last year effectively locked in a negative year for equity markets and put a fork into the August 2022 rally. Will that happen again this year? Markets seem to be hedging as we have come off a strong July and are drifting downward with the dismal news cycle. It’s not surprising that yields are creeping up even though Fed Funds futures probabilities are currently forecasting only an 11% chance of a 25-basis-point (0.25%) hike at the Fed’s September meeting.
Fears of rising rates and a China slowdown conspired to drive markets lower for a third week, and the Dow — which was within 1,000 points of an all-time high at the end of July — was on pace for its worst week since March. We also crept tantalizingly close to 4,600 on the S&P 500 before giving up 200 points so far in August.
Still, the economy is in good shape, with the exception of an out-of-reach housing market. The consumer is still spending, despite higher gas and food prices. Recession appears not to be a concern at the moment. (Don’t tell that to bond traders, though.) Logic would tell us all these factors would favor the Fed pressing ahead with another rate hike. But as we all know, logic isn’t always predominant. If rates increase, and we are driven into a recession like the bond market is saying, that’s bad news for incumbents as the political season approaches. If Powell drops hints that the Fed is pausing, the equity markets will pick up on those hints as very welcome news.
Long hot summer nearing an end
Now that summer is winding down and we’re beginning to look forward to the fall, the overall mood (and the weather) needs an adjustment. Markets are in a mood and have begun to traffic in rumor and innuendo with the combination of a dismal news cycle, scant data, higher gas prices and stubborn inflation.
The tragic news from Maui has cast a grim mood over the nation, and then there’s the constant drumbeat of indictments of former President Donald Trump and scandal around Hunter Biden. Layer these headlines with Moody’s and Fitch’s watchlist additions and downgrades, the potential for higher interest rates, the China slowdown, and lingering questions around a possible recession. It all adds up to a pretty gloomy backdrop, and with real economic news either stagnant or nonexistent, the market gets broody and moody.
We are coming off a pretty strong run for equities, so the desire to bank gains is also in play. “Better safe than sorry” is the technical investment term at work here. The Fed is the wild card: If they signal a continued pause, it will embolden markets, and they will begin to hypothesize about when the Fed will start to lower rates. As we head into the 2024 elections, the push will be to goose the economy so that it’s not the primary concern in voters’ minds. Hopefully, cooler heads will prevail.
Coming this week
Powell is scheduled to speak on Friday, as the Fed wraps up its symposium in Jackson Hole.
Data is light again this week. We will see existing home sales on Tuesday, while mortgage applications, PMI flash and new home sales will come out on Wednesday. Jobless claims and the latest Fed balance sheet will be reported on Thursday. The week will close out with consumer sentiment on Friday.
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