July 28, 2023

Weekly Market Commentary July 24th to July 28th 2023

It was a big week for economic releases as the Fed felt there was enough strength in the economy to boost short-term interest rates once again by ¼ percentage point. Look for them to continue to be “data dependent” between now and the next meeting in September as to whether or not they are ready to pause. We also saw the first cut of second quarter GDP which came in much hotter than expected. Consensus called for around 1.8% but instead the actual was 2.4%. Clearly, higher interest rates are not yet slowing the economy which will only add more fuel to the fire for the Fed’s argument that the economy can handle higher rates.

On the inflation front, we received the third measure of prices in the month following big drops in both the consumer (CPI) and producer (PPI) indices. The year-over-year Personal Consumption Expenditures (PCE) followed suit and dropped from 4.6% to 4.1% in the month of June. The PCE is the figure used in GDP calculations so this may carry the most weight in the Fed’s eyes. Inflation has been sticky in some areas such as rents and consumer services, but there is no doubting the downward trend. Personal Income dropped for the month, but Personal Spending increased, showing how consumers continue to contribute to stubborn inflation.

Elsewhere in the “good news might be bad news” category, Durable Goods Orders came in much higher than expected at 4.7% when consensus called for 1.0%. Stripping out the volatile transportation sector and it still was a big beat. And Weekly Initial Jobless Claims surprisingly fell too. 221k people filed for unemployment benefits for the first time when 235k was expected. This number has been going up in the past couple of months and is a leading indicator of company layoffs. During any other economic times, both of these “wins” would be great news for the economy. But we are in an era where any good news might be perceived as bad news as it makes investors worried that the Fed will keep raising rates.

Lastly this week, we had the S&P Global Manufacturing and Services PMI’s and New Home Sales. Manufacturing, which has been in contractionary territory for quite some time, came in at 49.0 when 46.1 was expected. And Services, which had been red-hot, came in at a lower than expected 52.4. Remember, for this statistic, anything below 50 indicates contraction and above 50 means expansion. Is manufacturing rebounding and services cooling off? Time will tell. New Home Sales fell 5.2% month-over-month as continued higher rates and low inventory batter the housing market.

In equity markets, all three indices finished up for the week with the S&P 500 closing up 1.0% at 4,582; the Dow Jones Industrials up 0.7% at 35,459; and the NASDAQ up 2.0% at 14,317. In the bond market, shorter Treasuries were flat while longer yields were up. The 2-Year closed at 4.88%; the 10-Year at 3.96%; and the 30-Year at 4.02%.

A lighter week next week brings us the July Employment Report and the ISM Manufacturing and Services Indices.

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