Weekly Market Commentary: August 20-26, 2023
Mixed signals lead to mixed returns
Markets didn’t know which direction to go last week as they tried to decide which had more weight: the good news or the not-so-good news. On the good side, the labor market appears strong, as the weekly jobless claims report came in at 230,000, the lowest level in three weeks. And the housing sector appears to be coming out of its slump somewhat; in July, new home sales reached their highest level since early 2022 in July, even though the 30-year fixed mortgage rate hasn’t been this high since 2001.
On the other hand, second-quarter results from several retailers revealed a cautious picture of consumers. People have been relying heavily on their credit cards to get them by, and both Macy’s and Nordstrom reported a rise in credit card late payments and delinquencies. Several retailers — including Dollar Tree and Dick’s Sporting Goods — noted that earnings suffered from losses to theft. And existing home sales missed expectations, showing the housing industry still has a ways to go before finding its footing.
In the wake of these mixed signals, on Friday, Federal Reserve Chairman Jerome Powell gave his post-meeting remarks from Jackson Hole. Powell acknowledged that higher rates and tightening bank lending standards were cooling the economy but noted that economic growth remained above its longer-term trend. He concluded his remarks by saying, “As is often the case, we are navigating by the stars under cloudy skies.”
So is the Fed done raising rates? Not necessarily. Powell’s comments left the door open for additional rate hikes in the coming months. “Given how far we have come, at coming meetings we are in a position to proceed carefully,” he said. “We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.” But, Powell continued, “We will keep at it until the job is done.”
Powell’s comments caused fluctuations in both stock benchmarks and bond yields to end the week. The 10-year Treasury note came off its high of 4.33 on Monday and dipped slightly to 4.23 by the end of the week.
Still, the economy remains surprisingly resilient. Some estimates are even putting third-quarter growth on pace to greatly exceed 2%. Some economists say this may mean that the neutral rate of interest — the rate that promotes stable economic growth and inflation — may have been pushed permanently higher.
Coming this week
It’s a big week for data. We’ll get a look at how jobs are really doing with job openings (Tuesday), the ADP employment report (Wednesday), weekly initial jobless claims (Thursday) and nonfarm payrolls and unemployment rate (Friday).
On Wednesday, we’ll see the revised second-quarter gross domestic product (GDP) number, which is expected to remain unchanged at 2.4%. We’ll also see advanced retail and wholesale inventories plus pending home sales.
Thursday will bring more consumer data, with the Personal Consumption Expenditures (PCE) Index and personal income and spending.
The latest construction spending and manufacturing numbers will round out the week on Friday as we head into the long Labor Day weekend.
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