The Week in Review 9/25/2023

“You can never cross the ocean unless you have the courage to lose sight of the shore.”
Christopher Columbus

Good Morning,

Last week was a challenging week, even though the Fed “paused” on the relentless rate increases their narrative was “hawkish”, and interest rates rose.

And stocks were for sale, although selling was orderly.

All 11 S&P 500 sectors finished in the red last week. The consumer discretionary (-6.4%), real estate (-5.4%), and materials (-3.7%) were the top laggards while the health care sector (-1.2%) saw the slimmest loss.

The reason for the weakness was another big jump in Treasury yields. The 2-yr note yield climbed eight basis points this week to 5.12%. The 10-yr note yield climbed 12 basis points last week to 4.44%. Including last week's move, the 10-yr note yield is up 35 basis points this month.

Those moves were largely in response to the Fed's hawkish pause on Wednesday.

As expected, the FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%. There were few changes to the directive itself, but the market was focused on the Summary of Economic Projections and dot plot, which conveyed two key takeaways: (1) Policy rates are anticipated to remain higher for longer and (2) Fed officials are not expecting to cut rates in 2024 as much as they were anticipating when they updated their forecasts in June.

The median fed funds rate estimate for 2023 was unchanged at 5.6%, but the median estimate for 2024 was 5.1%, versus 4.6% in June. The former estimate suggests officials are still leaning in favor of one more rate hike this year, whereas the latter revision connotes an expectation that rates will come down by only 50 basis points in 2024, as opposed to 100 basis points when estimates were provided in June.

Meanwhile, the median estimate for 2025 was 3.9% versus 3.4% in June, and a median estimate of 2.9% was introduced for 2026. The longer-run fed funds rate estimate was maintained at 2.5%, leaving one to infer that the Fed is going to stay committed to its 2.0% inflation target.

Fed Chair Powell said several times during his press conference that the Fed is going to "proceed carefully" when thinking about making a policy move, but said it's plausible that the neutral rate is higher than the longer run rate (2.5%), which he said is part of the explanation for why the economy has been more resilient than expected.

The wrinkle for the market wasn't that the Fed is decidedly “hawkish” at this point, it was that the Fed is still not “dovish”.

More Fed officials echoed Mr. Powell's view later in the week, specifically… San Francisco Fed President Daly (a 2024 FOMC voter), Fed Governor Bowman (FOMC voter), and Boston Fed President Collins (not an FOMC voter this year or 2024) all made similar comments on Friday.

Other central banks also made policy announcements this week around the globe.

The Bank of England voted 5-4 to leave its bank rate unchanged at 5.25%; the Hong Kong Monetary Authority left its key rate unchanged at 5.75%; the Swiss National Bank left its key rate unchanged at 1.75%; the Bank of Japan made no changes to its policy stance; the Riksbank increased its key rate by 25 basis points to 4.00%; and the Norges Bank increased its key rate by 25 basis points to 4.25%.

In corporate news… there were two notable initial public offerings this week. Instacart and Klaviyo, both traded above their IPO price after opening, but rolled over with the rest of the market by the end of the week.

The UAW extended its strike to all GM and Stellantis parts and distribution centers beginning at noon ET on Friday. This followed confirmation that the UAW made progress on labor talks with Ford, but indicated that Stellantis and General Motors are going to need "serious pushing”.

Market Snapshot...

• Oil Prices – Oil prices held steady but closed lower last week. West Texas Intermediate crude (WTI) rose 40 cents, or 0.5%, to close at $90.03/barrel. Brent crude settled 3 cents lower, or 0.3% to trade at $93.27/barrel.
• Gold – Gold prices edged higher helped by a pullback in the dollar. Spot Gold rose 0.3% to $1,925.21 per ounce, while U.S. gold futures gained 0.3% to $1,945.60. Silver closed out the week at $23.844.
• U.S. Dollar – The dollar index was higher at 0.2% to 105.78, on pace for a weekly gain of about 0.3%, its 10^th straight week of gains. Euro/US$ exchange rate is now 1.063.
• U.S. Treasury Rates – The yield on the 10-year Treasury note was down by nearly 5 basis points to 4.34%.
• Asian shares were mixed in overnight trading.
• European markets are trading lower.
• Domestic markets are trading in the red this morning.

It’s hard to believe, but the third quarter is coming to a close. Markets appear to have lost some of their momentum from the first and second quarters and could be stalling here due to the multiple headwinds.

This week will feature a plethora of housing data, August’s PCE report, and several speeches by Fed Governors, including Chairman Powell. We will also be watching Congress’s spending budget debate to see if they can pass the bill before the end of the fiscal year.

Have a wonderful week!

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