Weekly Market Report: December 27th, 2024

The holiday shortened final full week of 2024 featured a very light economic calendar and continued speculation as to the path forward for markets in 2025. Equity markets continued to digest monetary policy, trade policy, and the impact of prevailing interest rates. Global equity markets recovered slightly from the prior week’s consolidation with U.S. (+0.7%), developed international (+1.8%), and emerging markets (+1.0%) all posting marginal gains. Interest rates again drifted higher with 10yr yield closing at 4.62%, up nearly 100 bps since September 13th. Commodities posted marginal gains with oil up 1.6% to close back up over $70 and the USD building on its strong fourth quarter rally.

Market Anecdotes

• Equity markets have taken note of the move higher in interest rates against a backdrop of policy uncertainty, a marginally more hawkish FOMC, and a relatively healthy economy.
• Based on TLT fund flows, bond market investors seem to have shifted their opinion on Fed policy as it pertains to the long-run inflation objective with fund flows rotating from inflows to outflows beginning in early November.
• In contrast to fund flows, Wall Street forecasters overwhelmingly see bond yields falling in 2025 with only two of twelve banks predicting a further rise in interest rates.
• High interest rates certainly have a tightening effect on the economy and chilling effect on stocks, so does a strengthening USD. The recent rally of +7.7% since late September is similar to July ‘23-Oct ‘23 (+7.5%) but pales next to the persistent +27.4% move from June ‘21 – Sept ‘22.
• Fed funds futures markets are pricing in two 25 bps cuts over the next year, in line with Fed median dot plot at the time of their December meeting.
• The rise in interest rates and distinct possibility of persistently elevated rates for the foreseeable has our eyes on burgeoning credit risk in several direct lending products due to the prevalence of PIK interest structures, an aggressive feature found in many private credit funds.
• The increased prevalence of natural disasters and higher costs of materials have resulted in large home insurance premium increases, compounding the impact of higher mortgage rates on the U.S. housing market.
• With holiday shopping season now in the rearview, MasterCard SpendingPulse reported sales rose 3.8% YoY, more than forecasted and better than the same period last year.

Economic Release Highlights

• Consumer Confidence dipped in December to 104.7 off November’s 111.7 reading.
• New Home Sales in November cane in right at consensus 664k.
• Durable Goods Orders in November fell 1.1%, below the spot forecast of -0.2%. Ex-Transports missed (-0.1% vs 0.3%) while Core Capital Goods grew 0.7%, well above the 0.1% consensus.

Weekly Market Report: December 20th, 2024

Last week markets digested a very busy economic calendar, a highly anticipated FOMC meeting, and some political noise with another U.S. government funding standoff translating to a notable move higher in equity and bond market volatility. The week ended with equity markets down globally with U.S. markets (-2%), developed international markets (-4.8%), and emerging markets (-4%) all losing ground. Interest rates moved higher across the curve as 10yr yields traded back over 4.5% and the curve steeped with both 2yr/10yr and 3mo/10yr becoming more positively sloped. Risk aversion and hawkish Fed narratives contributed to a strengthening USD and weakening commodity markets where oil and industrial metals traded down approximately 1%-3% across the board.

Market Anecdotes

• The FOMC delivered a hawkish 25 bps rate cut to get to a 425-450 target along with cooling market expectations for rate cuts in 2025. Post meeting pressers and speaking engagements made clear the economy is strong and they have time to assess incoming data.
• The BoJ, the only G10 bank in hiking cycle, left rates unchanged at 0.25%.
• 2024, like 2023, has been a remarkable year for AI, consumer, and technology stocks with the Mag 7 rally looking similar, yet different, than historically concentrated markets of the past.
• A recent Barron’s cover echoed bullish Wall Street, fund manager, and household sentiment for 2025 where the Conference Board survey of U.S. households hit its most bullish reading since the survey’s inception and UofM survey noted investors moving aggressively into stocks.
• The surge in immigration is clear from the U.S. Census Bureau data with associated political and economic ripple effects just now taking shape.
• Economic and financial market landscapes heading into 2025 contain ample pros and cons to consider with corporate earnings, economic growth, inflation trends, market interest rates, labor market conditions, and policy all factoring largely into forecasts.

Economic Release Highlights

• The PIO report showed headline and core inflation running at 2.4% and 2.8% YoY respectively with MoM readings of 0.1%. Personal income and expenditures grew 0.3% and 0.4% MoM.
• The final revision to U.S. GDP surprised to the upside with headline growth and PCE both revised higher from 2.8% to 3.1% and from 3.5% to 3.7% respectively.
• U.S. PMI (C,M,S) registered 56.6, 48.3, 58.5 with a strong services report countering a weak manufacturing report resulting in an improved overall composite reading for December.
• European PMI (C,M,S) at (49.5,45.2,51.4) beat forecasts across the board. UK (50.5,47.3,51.4) beat on services but missed on manufacturing.
• Industrial Production (-0.1% vs 0.3%) and Manufacturing Output (0.2% vs 0.5%) both came in below the consensus estimate for November.
• Headline Retail Sales beat forecasts (0.7% vs 0.5%) but Ex-Vehicles and Ex-Vehicles & Gas both missed the spot consensus estimate (0.2% vs 0.4%).
• UofM Consumer Sentiment came in right at consensus forecast of 74.0 while 1 yr forward inflation expectations moved down from 2.9% to 2.8%.
• The Housing Market Index ticked down one point to 46 in December, below the consensus estimate of 47 and at the lower end of the forecast range.

Weekly Market Report: August 23rd, 2024

Last week, markets absorbed a relatively light economic calendar, the Jackson Hole Symposium, and a handful of remaining 2Q earnings reports. While the S&P 500 and NASDAQ snapped their 8-day winning streak last week, they still managed to post a nice weekly gain of approximately 1.4%. Small caps (+3.5%) and developed international (+3.1) both posted strong gains while emerging markets gained 1%. Bonds rallied as interest rates fell across the curve. The biggest move was in 2yr yields, down 16 bps to 3.90%. Longer maturities declined as well with the 10yr closing 8 bps lower to yield 3.81%. The USD fell 1.7%, continuing its descent since late June while commodity markets were mixed with energy price declines offset by strength in industrial metals.

Market Anecdotes

• The soft landing narrative has been dominant with the S&P 500 back to pre-July jobs report levels, and the Nikkei back to where it was prior to the Yen carry trade unwind. Cool inflation numbers, strong retail sales, and some light unemployment claims have aided momentum.
• The July FOMC meeting minutes released last week were dovish as expected and contained no material surprises. Several participants mentioned reported payroll gains might be overstated, which was indeed the case with an 818k downward revision announced on Wednesday.
• Powell’s remarks before the Jackson Hole Symposium indicated what markets were expecting, which is that “The time has come for policy to adjust” and that “the timing and pace will depend on incoming data, the evolving outlook, and the balance of risks.”
• Fed funds futures are pricing in a 25 bps cut in September with a 24% chance of 50 bps to begin the cutting cycle. Beyond that, markets see 1.25% of easing through the four meetings ending January and a total of eight cuts over the next 12 meetings.
• A ClearBridge study examined the drivers behind the rise in unemployment from 3.7% to 4.3%, concluding the higher percentage of “new entrants and re-entrants”’ instead of “job losers and leavers” supports the idea that the job market may be stronger than the data suggests.
• Overall financial conditions in the U.S. have become very supportive as measured by the Goldman Sachs FCI. However, the pace of labor market deceleration has the potential to trigger a feedback loop which may cause overall financial conditions to begin to tighten.
• The USD marked a new 2024 low last week, fueled in part by decelerating labor market concerns. USD is down 5% from its 2024 high back in April, 3% of which happened in August.
• As the November elections draw closer, we will begin to analyze fiscal policy (and executive actions?) as it relates to aggregate demand and financial markets as well as the longer-term implications of U.S. government deficit spending.

Economic Release Highlights

• The August Flash U.S. PMI saw the Services Index beat (55.2 vs 54.0) and the Manufacturing Index miss (48.0 vs 49.5) translating to a healthy Composite Index (54.1 vs 53.3).
• The August Flash Eurozone PMI (C,M,S) registered (51.2, 45.6, 53.3) where the manufacturing index missed and services index exceeded expectations. The UK registered (53.4, 52.5, 53.3), beating forecasts for both manufacturing and services readings.
• Existing Home Sales in July of 3.95M came in slightly above spot consensus of 3.90M, increasing 1.3% MoM and down 2.5% YoY. New Home Sales in July of 739K were well above the spot forecast of 628k and the consensus forecast range of 605k-648k.
• The Conference Board LEI Index registered -0.6% in July, extending its lengthy deteriorating trend.

Weekly Market Report: August 16th, 2024

Market Anecdotes

• Equity markets welcomed last week’s busy economic calendar following recent concern surrounding a slowdown in the U.S. economy. The inflation, retail sales, and labor market indicators generally served to soothe markets.
• Economic data and FedSpeak last week translated to reduced market expectations for aggressive rate cuts where probabilities of a 50 bps cut at the upcoming September FOMC meeting fell from 51% to 26% but a 25 bps cut is carrying a 75% probability.
• As the Fed approaches an easing cycle Bespoke noted, despite cuts already from many central banks, the GDP weighted average global policy rate has only fallen 25bps since the 6%+ level.
• The unofficial close of 2Q earnings season with the Walmart report on Thursday leaves the S&P 500 with YoY blended earnings and revenue growth were 10.9% and 5.2%, respectively.
• A recent survey by Affirm showed 59% of respondents falsely believe the U.S. is currently in recession, likely due to the difficulty of inflation pressure on lower income households. The most recent Bloomberg survey shows 30% of economists expect recession within a year.
• A hazardous materials explosion at the world’s third busiest container port, the Ningbo Port in China, leading to its indefinite closure, is expected to impact key trans-Pacific trade lanes, supply chains during peak shipping season.
• An index from Eurekahedge which tracks hedge funds who utilize AI and machine learning theory suggests that portfolio manager jobs appear to be safe, at least for now with the S&P 500 dramatically outperforming, particularly since ChatGPT was launched.

Economic Release Highlights

• July CPI YoY Headline (2.9% vs 3.0%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.2% vs 0.2%) both registered generally in line with consensus estimates.
• July PPI YoY Headline (2.2% vs 2.6%) and Core (2.4% vs 3.0%) along with MoM Headline (0.1% vs 0.2%) and Core (0.0% vs 0.2%) came in below both forecast and prior month readings.
• The July NY Fed Survey of Consumer Expectations reported 3-year inflation expectations fell by 0.6% to 2.3% while median 1yr (3.0%) and 5yr (2.8%) were unchanged.
• July Retail Sales were above the high end of the forecast range and well above the spot forecast for Headline (1.0% vs 0.3%), Ex-Vehicles (0.4% vs 0.1%), and Ex-Vehicles & Gas (0.4% vs 0.3%).
• Weekly Jobless Claims were below the spot forecast and toward the low end of the range (227k vs 234k). The labor market has seen tour week moving average claims fall from 241k to 236.5k.
• The July NFIB Small Business Optimism Index registered 93.7, above both the spot forecast (91.7) and toward the high end of consensus range (91.6-92.0).
• August UofM Consumer Sentiment reading of 67.8 was slightly better than spot consensus 67.0 and within the forecast range (65.0-69.1).
• The Housing Market Index dropped in August to 39, missing the consensus estimate of 42.
• July Housing Starts (1.238M vs 1.342M) and Permits (1.396M vs 1.430M) slowed down from June and came in below estimates.
• July Industrial Production cooled relative to June’s strong 0.6% reading and came in below forecast (-0.6% vs -0.1%).

Weekly Market Report: August 9th, 2024

Global equity and bond markets endured another volatile week despite a notable lack of catalysts. U.S. equity markets spent most of the week clawing back from Monday’s selloff thanks to a reappearance of the soft- landing narrative, an uptick in corporate buyback activity, and bounce momentum leading to lower systematic selling estimates. Last week saw a relatively light economic calendar and a continuation of second quarter earnings reports. U.S. equity markets were down and up during the week but ended flat (-0.04%) while international developed (+0.49%) and emerging (+1.11%) both managed marginal gains. Bond yields continued to reclaim lost ground of the past two weeks in what was a relatively parallel shift higher approximately 12 to 18 bps. The USD was unchanged against a basket of currencies, including the Yen, and commodity markets traded higher thanks in large part to a 4.5% rally in WTI crude oil which closed up 4.5% to $76.84.

Market Anecdotes

• Examining market internals and trending economic data over the past two weeks in an effort to conceptualize the sudden surge in volatility leaves our short term (neutral) and intermediate term (cautious) views largely unchanged.
• Apollo noted the low level of job cuts to reinforce the idea that the Sahm Rule does not apply to the current labor market due to the significant increase in immigration.
• A close look at the behavior of high yield credit spreads made clear there was not a material spike in perceived credit risk to go along with the material spike in equity market volatility.
• Several strategists have highlighted market leadership rotation evident since the soft July 11th CPI report, seemingly a marker for reestablishing the disinflation narrative and an associated dovish monetary policy pivot acknowledging labor market deterioration.
• Now in the later stages of the earnings season (91% of S&P 500 reported), second quarter blended earnings have grown 10.8% with beat rates of 78% and beat margins of 3.5%. Revenue grew by 5.2% with below average beat rates (59%) and beat margins (0.5%).
• Bloomberg’s Taro Kimura noted recent speculative Yen short positioning is as ‘offside’ as we’ve seen since the Yen carry trade implosion we saw back in 2007.
• The 2/10 curve which has been inverted since July 2022 ‘uninverted’ briefly last week which, in the past four recessions, has happened on average two to six months past the beginning of the recession.
• Trepp CMBS Research noted 30-day CMBS delinquencies ticked higher in July to 5.45%, up from 4.41% last year, with over 65% of newly delinquent loans coming from the office sector which is now over 8%, up sharply from 4.96% last year.
• The global geopolitical landscape remains in flux with a potentially large conflict looming in the middle east between Israel and Iran.

Economic Release Highlights

• The July ISM Services Index (51.4 vs 51.0) was generally in line and improved over June’s 48.8.
• The JPM Global Composite PMI registered a composite reading of 52.5 and services of 53.3.
• Weekly jobless claims came in below expectations (233k vs 240k) and the 4-week moving average claims increased to 240k.