Highlights
- U.S. equities touched new YTD lows on Friday, suffering their worst September in nearly 2 decades.
- Quarterly, the S&P 500 finished down 5.28%, while the Nasdaq and Dow Jones closed lower by 4.11% and 6.66%. In their 3rd straight month of losses, which hasn’t occurred since 2008.
- Tech was the worst performing sector with AAPL down over 8.0% on iPhone 14 production scale backs, AAPL makes up 7% of S&P 500 and is more than 13% of the QQQ.
- On Monday, the ISM manufacturing came in at 50.9 vs estimates of 52, falling to a more than 2-year low and moving closer to contraction territory (Sub 50 is seen as contraction), but stocks jumped with the theme bad-news is good-news.
- Crude posted its first weekly gain following 4 straight weeks of declines, being supported by OPEC+ who are widely expected to announce output cuts at their upcoming October 5th meeting.
- In the United Kingdom, Bank of England (BOE) intervened in the bond market last Wednesday as the 30-year gilt yield rose to 5% following Liz Truss’s tax cuts announcement. Policy makers plan to purchase over $1 billion of long-dated securities (20+ years) at each auction until October 14th.
- In Japan, the Ministry of Finance disclosed close $20 billion spending in September on currency intervention to support the yen.
- In Brazil, Lula and Jair Bolsonaro emerged as winners of the first round of presidential elections. Most polls predicted Lula’s victory in the first round, but Bolsonaro managed to collect 43% of the votes, versus 48% for Lula.
Market Commentary
U.S. WEEKLY
US Weekly: U.S. equities finished lower last week, suffering their worst September in nearly 2
decades after continuing to feel the pressure of higher rates and hawkish global central banks. As
the quarter closed out, equities were met with more downside pressure, touching new YTD lows on
Friday with major indices closing lower for the 6th time in the last 7 weeks, as the S&P 500 fell
below 3,600, touching its lowest levels since November 2020.
This is the third week that all sectors, outside of energy, have closed negative, providing clear
evidence of how broad and far reaching the most recent pullback has been. The put/call ratio on US
stocks has surged above 1 during the market decline of the past two weeks, according to the Chicago
Board Options Exchange. That level corresponds with market lows hit during past selloffs.
Energy was the only sector to finish higher, after Crude posted its first weekly gain following 4 straight weeks of declines, being supported by OPEC+ who are widely expected to announce output cuts at their upcoming October 5th meeting. Materials (metals) and healthcare (pharma/biotech) were among the relative outperformers, but still declined marginally. Tech was the 2nd worst performing sector on the week, weighed down by AAPL who lost more than 8% after reports surfaced that the company would ditch plans to increase iPhone 14 production due to lackluster demand. Following the warning, Apple suppliers and chip names tumbled with both semiconductor names and electronic components registering another weekly loss (Their 3rd straight). It is worth noting, other Mega Cap Tech names, particularly those from the FANMAG complex, fared much better with NFLX ending higher on the week and AMZN ending down less than 1%.
For the quarter, the S&P 500 finished down 5.28%, while the Nasdaq and Dow Jones closed lower by 4.11% and 6.66%, respectively. It was the 3rd straight month of losses for the S&P 500 and Nasdaq, with the last time occurring in 2008, during the throes of the Global Financial Crisis (GFC).
Stocks kicked off this week with big gains as the run up in yields halted, pausing a seemingly endless surge, as weak US manufacturing data soothed some concerns regarding the Federal Reserve’s monetary policy path.
In what was a bad-news-is-good-news day on Monday, all major US indices jumped more than 2% following the release of poor manufacturing data. ISM manufacturing came in at 50.9 vs estimates of 52, falling to a more than 2-year low and moving closer to contraction territory (Sub 50 is seen as contraction). The metric suggested the economy may be faltering, reducing the urgency for more aggressive rate hikes. On the news, stocks surged, with selling exhaustion setting in as about 95% of the S&P 500 ended in the green, with the gauge having its best day since July. Aside from being oversold from a technical perspective, extreme pessimism and low risk positioning also fueled a rebound that followed its third-worst performance during the first 9 months of a year since 1931. Looking to the rest of the week, the big
event will be the release of September nonfarm payrolls on Friday, with consensus expecting a monthly gain of 250K, in what would be a step lower from the August 315K gain.
The market will also digest September ISM services (Wednesday), a plethora of Fed speak, with appearances from governors Waller, Cook, and Johnson, along with 6 regional presidents. Rate hikes are also widely expected from the Royal Bank of Australia, Royal Bank of New Zealand and ECB minutes from the most recent meeting on Friday. Oil may receive a boost based on the OPEC+ meeting which is scheduled for October 5th, with expectations calling for an output cut between 500K-1Mbpd.
WHAT HAPPENED
The path of least resistance remained firmly to the downside with a number of Fed members reaffirming their commitment to higher rates and their continued tightening of monetary policy conditions. Outside of additional comments by various Fed members, which can be found below, there were no new developments on this front, as the Fed has already indicated that it will continue to raise rates until it sees “clear and consistent” evidence that inflation is abating. As Powell noted in his last press conference, “The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer.” With this in mind, the focus has shifted from, whether a recession is likely, to when and how deep a potential economic downturn may be.
COMMENTS FROM FED MEMBERS INCLUDED:
• Thursday St. Louis Fed president Jim Bullard stated the U.S. inflation rate was way above the Federal Open Market Committee’s 2% target, which is why the FOMC has moved aggressively to raise its policy rate. He also alluded to additional hikes the Fed plans to take this year.
• Fed Vice Chair Lael Brinard commented on Friday “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target”. This supports the Raise-and-hold/Higher-for-longer mindset.
• New York Fed President John Williams on Monday (10/3) said the US central bank still has more work to do to curb inflation, warning that the process will take time
HIGHER MORTGAGE RATES/ LOWER DISCRETIONARY INCOME
With inflation, higher lending rates and less discretionary income for US consumers dictating much of the narrative, Freddie Mac this week announced their new 30-year mortgage rate stood at 6.7%. However, the new average of 6.85% according to Bankrate is more than 3.10% higher than this week one year ago and is more than 4% higher than in early 2021, with the most recent levels not being seen since the early 2000’s.
The spike in rates is largely a function of the Federal Reserve continuing to increase its benchmark rates in its effort to curb inflation. However, even with the spike in rates, we have yet to see home prices decrease to levels prior to the pandemic, when rates stood at 3.78% at the end of the 4Q in 2019, bringing into question the housing market, affordability of homes and their effect on discretionary income.
That theoretical $1,000 decrease in disposable income has been seen in a wide variety of consumer discretionary names who have already reported this quarter. Carnival (CCL) reported a revenue miss on inflation headwinds, as higher fuel prices and cheaper, discounted fares (to attract bookings) failed to overcome additional expenses. Nike (NKE) lost more than 14% on the week, due to a big inventory build and gross margins that missed estimates. Bed Bath and Beyond and VFC corp also reported estimates that missed expectations, both citing increasing inventories and markdowns. Furthermore, Meta (META), Docusign (DOCU) and Lyft (LYFT) all reported workforce actions, with Meta specifically noting its first planned reduction of staff ever.
INTERNATIONAL:
The Bloomberg World index dropped 2.49% last week, with growth down 2.13% and value down 2.77%. Brent crude oil futures advanced 2.1% on the week as the alleged sabotage of the Nord Stream pipelines triggered speculation about energy supply. Russian annexation of four Ukrainian regions added to geopolitical uncertainty as the United States issued new sanctions against Moscow. The JPMorgan Global Manufacturing PMI slid for the seventh consecutive month to 49.80, versus 50.30 a month earlier. The last time global PMI dipped below 50.0 was in June 2020.
EUROPE
In the United Kingdom, Bank of England (BOE) intervened in the bond market last Wednesday as the 30-year gilt yield rose to 5% following Liz Truss’s tax cuts announcement. BOE reassured markets by pledging unlimited bond-buying to restore market stability. Policy makers added they plan to purchase over $1 billion of long-dated securities (20+ years) at each auction until October 14th. On Monday, British finance minister announced the government will reverse its plan to lower the highest rate of income tax for top earners. Prime Minister Liz Truss tweeted, “We get it and we have listened. The abolition of the 45pc rate had become a distraction from our mission to get Britain moving.” The FTSE 100 index declined 1.78% last week while the pound strengthened against the dollar.
European Union countries have reached a preliminary agreement on Russia sanctions that include oil price cap. EU leaders expect to finalize the deal at their next meeting in Prague on Friday. This year, Europe has managed to reduce crude shipments from Russia from 1 million barrels a day to 200,000 barrels a day. In September the Eurozone inflation soared to a record 10%-year-over-year, as energy prices climbed 40.8% year-over-year and food, alcohol and tobacco rose 11.8%. The Euro rallied to 98 cents per dollar, boosted mid-week by the BOE intervention. The Euro STOXX index dropped 0.98% last week, with banks down 5.47% and utilities down 5.78%. Energy was the best performing sector, up 2.9%.
APAC
In China, the People’s Bank of China and the China Banking Insurance Regulatory Commission asked the six largest banks to provide $85 billion in property funding to stabilize the real estate market. This request comes as the government unveiled a new tax incentive for home buyers last week to prop up demand. According to PBOC data, property loans grew at the slowest pace on record in the first half of the year. Meanwhile, the government authorized over 20 cities to lower their mortgage rate for primary home loans as property prices keep declining. Chinese developer’s dollar bonds rebounded on the news but remain at distressed levels. On Monday, real estate stocks in the Shanghai Composite index climbed 2.77% and the offshore yuan rallied 4 basis point versus the dollar.
In Japan, the Ministry of Finance disclosed close $20 billion spending in September on currency
intervention to support the yen. Economist Yuki Masujima wrote, “Japan’s FX intervention may work
on a very limited basis as a time-buying strategy until a slowing US economy causes the FED to
reverse course”. Last week, the yen rose close to 146 per dollar before settling down at 143 per
dollar following the FX intervention. Prime Minister Fumio Kishida asked his government to work on
a stimulus package that will address growth and inflation concerns. In September, Manufacturing PMI
decelerated for the sixth consecutive month to 50.80, versus 51.50 a month earlier. The NIKKEI 225
index dropped 4.48% last week
EMERGING MARKETS
In Brazil, Lula and Jair Bolsonaro emerged as winners of the first round of presidential elections. Most polls predicted Lula’s victory in the first round, but Bolsonaro managed to collect 43% of the votes, versus 48% for Lula. The second round will take place on October 30th. With inflation running at 8.7% and unemployment rate at 9%, Bolsonaro will have to defend his track record and provide a credible plan to boost the economy. Manufacturing PMI slid for the third consecutive month to 51.10 as demand softened. On Monday, the real jumpe as much as 4.7% against the dollar following election results and Brazilian assets rallied. Brazilian stocks soared 5.37% on Monday as risk
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