The Week in Review 9/18/2023
“Defeat is a state of mind; no one is ever defeated until defeat has been accepted as a reality.” – Bruce Lee
Good Morning ,
A choppy week in the markets ended roughly flat. Volatility was triggered by mixed reactions to inflation, a rate hike by the European Central Bank, rising energy prices, and an auto industry strike that forced stocks to close lower on Friday.
The Dow Jones Industrial Average eked out a slim gain this week while the S&P 500 and Nasdaq saw modest declines. The beginning of last week was quiet in terms of market-moving events and somewhat light on participation. The second half of last week featured plenty of market-moving events, capped off with a quarterly options and futures expiration day on Friday. Downside moves had the S&P 500 and Nasdaq close below their 50-day moving averages.
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The major indices had been on track for a winning week until Friday's retreat. Despite a lower finish at the index level, eight of the 11 S&P 500 sectors closed with a gain. Information technology, which is the most heavily weighted sector, declined 2.2%.
Apple was a top laggard from the info tech sector, dropping 1.8% this week amid reports of ongoing scrutiny in China and following its product event that featured the introduction of the iPhone 15. Adobe was another weak component, dropping 5.6% following its underwhelming fiscal Q4 guidance.
Weak semiconductor constituents also contributed to the sector's underperformance. That weakness followed Arm's successful IPO on Thursday and a Reuters report that Taiwan Semiconductor Manufacturing Co. is delaying chip equipment shipments. The PHLX Semiconductor Index fell 2.5%.
Netflix, which is among the top performers this year, tumbled 10.4% this week after its disclosure that the ad business is not material yet to its overall revenue.
The collective weight of large cap losses weighed heavily on index performance.
There were some other corporate news items that drove selling activity, including Spirit Airlines, Frontier Group, Delta Air Lines, and American Airlines all warning about their Q3 outlooks partially due to rising fuel costs.
Additionally, the United Auto Workers launched targeted strikes at three manufacturing plants (one for each of the Big Three) after being unable to reach a deal on a new contract with the automakers. Ford, Stellantis, and General Motors all still closed with gains of 2.5%, 5.6%, and 3.0%, respectively, last week.
Market participants also digested a slate of economic releases. Chief among them was the August Consumer Price Index report. Total CPI was up a robust 0.6%, as expected, and core-CPI, which excludes food and energy, was up 0.3% (consensus 0.2%). That left total CPI up 3.7% year-over-year, versus 3.2% in July, and core CPI up 4.3% year-over-year, versus 4.7% in July.
The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.
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Treasuries handled this week's inflation data reasonably well, which was supportive of stocks. Yields drifted higher, but moves weren't panicky. The 2-yr note yield rose seven basis points this week to 5.04%. The 10-yr note yield rose seven basis points this week to 4.33%.
Rising oil prices remained top of mind this week. WTI crude oil futures jumped 4.2% to $91.00/bbl.
As a reminder, the Fed meets next week with a policy decision announcement at 2:00 p.m. ET on Wednesday. Market participants are not expecting a rate hike and will be more focused on the updated Summary of Economic Projections and the tone that Fed Chair Powell takes at his press conference.
Market Snapshot…
- Oil Prices – Oil gained for the third straight week on tight supply. Oil prices hit a 10-month high with West Texas Intermediate crude (WTI) up 61 cents, or 0.7%, to close at $90.77/barrel. Brent crude futures rose 23 cents, or 0.3% to trade at $93.93/barrel.
- Gold– Gold prices edged up 1% on dollar weakness. Spot Gold inched 0.9% to $1,927.79 per ounce, while U.S. gold futures gained 0.9% to $1,949.70. Sliver closed out the week at $23.366.
- U.S. Dollar– The dollar index was down 0.08% at 105.32 but was still poised for a ninth straight weekly gain. Euro/US$ exchange rate is now 1.068.
- U.S. Treasury Rates– The yield on the 10-year Treasury note was trading 4 basis points higher at 4.332%.
- Asian shares were mostly lower in overnight trading.
- European markets are trading down.
- Domestic markets are trading down slightly this morning.
This week’s focus will of course be on the Fed’s FOMC meeting where it will make another interest rate decision. According to CME’s FedWatch tool, which calculates probabilities of rate hikes based on futures market activity, the overwhelmingly expected outcome is for another pause in this hiking cycle. Chairman Powell has alluded that this hiking cycle could be nearing its conclusion. However, that's always subject to incoming data.
Last year, some economists and analysts were calling for rate “cuts” to start occurring in 2023. Now, we likely won’t see any cuts until mid to late 2024. Additionally, if the Fed hikes rates again in November, which is still on the table, the rate cuts will only get pushed back further, possibly to late 2024. Last week the European Central Bank raised its key interest rates an additional 25 basis points (0.25%) but took a dovish stance, indicating that it believes interest rates are sufficiently high enough to curb inflation if maintained at these levels for an extended period of time.
The Fed will also release its updated dot plot, which shows the FOMC members’ expectations for the interest rate path as well as expectations of major economic data, including inflation, labor, and GDP. This report, in addition to Chairman Powell’s speech, will give us a good initial indication of how the Fed is leaning for its November meeting. The past two inflation reports have given some credence to a potential rate hike at that time.
Have a wonderful week!!
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