- US equities finished lower for a 3rd straight week, with the Russell 2K declining 4.74%, followed by the Nasdaq (4.21%), and S&P 500 (3.29%).
- With the risk-off tone underpinning markets, the S&P 500 has now declined 8.8% since topping. 4,300 on August 16th amid fears a more aggressive Federal Reserve may send the US economy into a recession.
- The Dollar index was stronger, setting a new fresh 20-year high and logged its 4th gain in the last 5-weeks. It continues to trade near its strongest level in 20 years versus the Euro, while the Yen has pulled back 46% against the USD, its largest ever peak to trough decline against the Dollar.
- All sectors finished lower on the week. Materials was the largest underperformer which came after commodities were pounded on Tuesday as investors weighed a hawkish Fed, a deepening energy crisis in Europe and the possibility for a prolonged economic slowdown in China.
- Despite the 4% weekly decline in the Bloomberg commodity index, the benchmark is still up more than 20% for the year.
- Non-farm payroll data, showed an addition of 315,000 jobs, which came in 15,000 above expectations. Mining activities and scenic/sightseeing transportation jobs were among the fastest growing jobs added in August.
- Markets continue to price in 75bps raise to the Federal Funds rate in September, but have pushed out their expectations for a cut in the Fed funds rate until the end of 2023.
- September has seasonally been a weak month with major benchmarks posting a negative average return in September over the past 30 years.
- On Friday, G7 countries agreed to set a price cap on Russian oil to limit Vladimir Putin’s ability to fund its war.
- Russia reacted to G7 agreement by shutting down its Nord Stream 1 pipeline indefinitely and shifting payments to 50% in rubles and 50% in yuan.
US equities finished the week lower for a 3rd straight week with the S&P 500 falling back below the widely watched 4K level. The Russell 2K was the largest weekly decliner, falling 4.74%, followed by the Nasdaq (4.21%) and the S&P 500 (3.29%). With the risk off tone gripping markets, the S&P 500 has now declined 8.8% since topping 4,300 on August 16th amid fears a more aggressive Federal Reserve may send the US economy into a recession.
Treasuries were weaker with a steepening yield curve. The 10-year treasury yield gained 8bps on the week to close at 3.19%, but was off the weeks high of 3.29%. On Monday of this week, the sell-off in Treasuries continued with 10-year yields gaining another 15bps, pushing it back above 3.33% its highest closing level since mid-June.
The Dollar Index was stronger, gaining 0.8% on the week and set a new fresh 20-year high, logging its 4th gain in the last 5-weeks. The value of the US Dollar remains near its highest levels in roughly 20 years relative to the Euro, while the Yen’s 46% decline against the Dollar is now the worst on record (since Japan introduced the floating rate system in 1973), at least going by peak to trough declines.
Crude oil was lower, with WTI finishing down 6.7% and settling back below $90/barrel. It is worth noting that OPEC+ announced it would cut output by 100K bpd in October on Monday, however, the announcement is seen more as a symbolic gesture, versus an impactful one, and had little impact on price action to start the week.
With the recent slide in oil prices, US benchmark gasoline futures, have given back all of their war-driven gains as prices tumbled to $2.39/gallon, the lowest since February 18th. The plunge comes as the summer driving season nears its end, with regions transitioning to winter-specification fuel that is typically cheaper to make.
All 11 sectors finished lower on the week, with Materials, Technology and REIT’s registering as the main underperformers. Materials lagged due to weakness in industrial metals and chemicals, after raw materials were hammered on Tuesday. The Bloomberg commodity index, a gauge that tracks return on commodities, ranging from copper to crude to coffee and cattle, posted its largest daily drop since July 12th, and came as investors weighed the following:
- An economic slowdown in China driven by a property crisis and covid lockdowns.
- A hawkish Federal reserve that looks to continue to dampen demand with higher rates.
- A deepening energy crisis in Europe with the Nordstrom 2 permanently offline.
Despite the more than 4% decline on the week, the index is still up more than 20.10% for the year.
Semiconductors were the main drag on tech, following news that NVDA and AMD would have new export restrictions imposed by the US government when sending their products abroad to China.
With a tough macro backdrop underpinning global markets, US and European equities are entering the seasonally weakest time of the year. Major benchmarks have posted a negative average performance in September over the past 30 years, and with current issues plaguing markets, investors remain unlikely to jump head first back into risk assets until there is additional clarity.
The most important news on the week, which largely underpinned sentiment, was the release of August’s non-farm payroll data, showing 315,000 jobs were added in August. The headline number beat expectations by more than 15,000, illustrating the current strength of the US economy and corporations alike. Below are the industries with the highest and lowest rates of employment growth for August.
The strong report falls in-line with the recent string of better-than-expected jobs data, further making the case for aggressive rate hikes from the Federal Reserve, ultimately increasing the possibility of a US recession.
Additionally, data showed 1 million new workers joined the US labor force as the Participation (which includes those actively seeking jobs and those actively employed) climbed to 62.4% from 62.1%. With the additional job seekers, this pushed the unemployment rate higher to 3.7% from 3.5% (still near record lows), a move that Federal Reserve will gladly welcome as they continue to try and raise borrowing rates.
Federal Reserve Remains Hawkish
The strong non-farm payroll report was another clear sign that the effects of rate hikes delivered by the Federal Reserve have yet to negatively impact the labor market in a clear demonstrable way. The theme of “good news, is bad news” continued to play out following the announcement, as markets continued their decline on Friday (S&P fell more than 1%), with the belief that the path of monetary policy appears to be “higher for longer”.
Much of the focus as of late has been on the Fed’s “raise and hold” messaging, with no real new developments in comments from Federal Reserve members, to deviate from that theme. Many now think this will continue to embolden the Feds hawkish stance, leaving more room to operate with raising rates in order to combat higher inflation.
Following the jobs report, market probability of a 75bp hike in September remained steady, however, the forecast for a rate cut was pushed back to the end of 2023, or 1H of 2024, when this was previously expected to occur in mid-2023. Similarly, a pause in rate hikes which was initially predicted to occur later this year, is now estimated to occur around the middle of 2023 when the Fed Funds rate is expected to be closer to 4.0%.
The Bloomberg World index declined 3.30% last week, with growth down 3.97%% and value down 2.67%. Brent crude oil futures dropped 7.89% last week amid China lockdowns and demand concerns. Furthermore, the prospect of an Iran nuclear deal is adding downside pressures as oil supply could increase by 1-2 million barrels per day. The Bloomberg Commodity index declined 4.41% during the same period, with grains down 0.83% and industrial metals down 8.21%. The JPMorgan Global Manufacturing PMI ticked down for the six consecutive month to 50.30 in August, while Global Services PMI dipped below 50.0 for the first time June 2020.
On Friday, G7 countries agreed to set a price cap on Russian oil to limit Vladimir Putin’s ability to fund its war. In a joint statement, Finance Ministers of G7 countries announced that the price cap will be set by a “broad coalition of countries”. Russia reacted by shutting down its Nord Stream 1 pipeline indefinitely and shifting payments to 50% in rubles and 50% in yuan. Gas prices surged 35% on Monday before settling 15% higher. Germany announced it will keep its two nuclear plants in reserve in case they need it this winter. Olaf Scholz and Emmanuel Macron also pledged to help each other through the winter with electricity and gas supplies. European Union energy ministers should meet on Friday to discuss solutions for the energy crisis. The Euro STOXX index dropped 1.38% last week, with technology down 4.31%.
In the United Kingdom, former Foreign Secretary Liz Truss won the Conservative Party leadership race against Rishi Sunak by 81,326 votes to 60,399. She succeeds Boris Johnson as UK’s new Prime Minister and inherits an economy weakened by double-digit inflation and consumer confidence at record low. Following election results, Truss told party leaders, “I campaigned as a Conservative and I will govern as a Conservative. We need to show we will deliver over the next two years. I will deliver a bold plan to cut taxes and grow the economy.” The British pound stayed flat at 1.15 per dollar, near the lowest exchange rate since March 2020. The FTSE 100 index declined 1.97% last week, with alternative energy down 12.26%.
In China, the People’s Bank of China (PBOC) intervened in the currency market to defend the yuan against a strengthening dollar. Last week, the PBOC set yuan’s reference rate at 6.90 per dollar and announced it will reduce foreign currencies held in reserve. The China 10-year Treasury bond yield rallied 3bps to 2.63%. In other news, the Caixin China Manufacturing PMI declined for the third consecutive month to 49.50 as power outage and temporary factory closures impacted production. The employment sub index contracted for the 12th time in the past 13 months due to cost-cutting initiatives. The Shanghai Composite index declined 1.54% last week, with industrials down 2.29%. Real estate was the best performing sector, up 1.41%.
In Japan, the Finance Minister said that the high volatility in the yen is not ideal and that the government will closely monitor the currency market. Last week, the yen hit a 24-year low and closed at 140 yen per dollar. The policy divergence between the Federal Reserve and Bank of Japan is expressed in the bond market by the US yield premium over the Japan 10-year. Last week, the US-Japan real yield gap widened to 1.55% as Fed officials reinforced their willingness to tighten financial conditions until inflation cools off. In the broad economy, the Jibun Bank Japan Manufacturing PMI edged down for the fifth consecutive month to 51.50. The NIKKEI 225 index dropped 3.46% last week.
In Brazil, Roberto Campos Neto, President of Central Bank of Brazil, told reporters, “We need to send out a hard message. The message that’s still valid is that we’ll evaluate the need for a final rate hike.” Brazil analysts have 13.75% Selic rate as their base case for the end of the year and 11.25% by the end of 2023. Early tightening of financing conditions by Central Bank of Brazil has allowed the economy to rapidly adapt to changing conditions as inflation surged as high as 12.13%. In the second quarter, GDP advanced 3.2% year-over-year, well above the median estimate. Despite good economic data, current President Jair Bolsonaro is still trailing former President Lula in Brazil first round polls. Brazilian stocks dropped 1.28% last week.
In Mexico, the Central Bank cut the 2023 growth forecast to 1.6% from 2.4% three months earlier. Banxico kept its 2022 GDP forecast at 2.2% as current macroeconomic challenges were already factored in the previous estimate. Regarding monetary policy, Governor Victoria Rodriguez Ceja said, “It is extremely important to keep rate aligned with the Fed”, implying that a 75bp rate hike is on the table at the next policy meeting. The last inflation print showed signs that consumer prices growth may have peaked, with headline CPI rolling over from 8.5% to 8.1%. In August, Mexico Manufacturing PMI remained in contraction territory at 48.5 for the second month in a row. Mexican stocks declined 2.93% last week.
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