Last Week In Review
Last week stocks finished lower as investors continued to digest the implications of hawkish messages from Federal Reserve officials. The S&P 500 Index extended the daily losing streak that began with Fed Chair Jerome Powell’s August 26 speech at the central bank’s Jackson Hole conference, widely perceived as hawkish, through Wednesday before rising marginally on Thursday. Value stocks continued to outperform high-valuation growth stocks, and large-caps held significantly better than small-cap shares. Energy shares suffered as oil prices declined below USD 90 per barrel for West Texas Intermediate crude, the U.S. benchmark.
Stocks that fell short of earnings estimates or issued disappointing earnings guidance were punished much more than those that beat estimates were rewarded. This resulted in significantly higher volatility among certain individual stocks than the broad indexes reflected, particularly for software companies with earnings that missed estimates later in the week.
US – Markets & Economy
Friday’s August jobs report from the Department of Labor showed that the economy added 315,000 jobs last month, a number seen as solid though down from a revised 526,000 in July. The unemployment rate rose to 3.7% from 3.5% in July as the labor force participation rate increased. Earlier in the week, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) for July indicated that job postings unexpectedly increased, reaching nearly two per unemployed worker.
Public statements by Fed officials continued to reinforce the message that the central bank is determined to raise rates enough to get inflation under control. Cleveland Fed President Loretta Mester said that she anticipates that interest rates will still need to rise significantly for the Fed to fight inflation effectively. Atlanta Fed President Raphael Bostic echoed that sentiment, saying “we have some work to do” before the central bank’s drive to temper inflation is complete.
US – Equity Market Performance
|Index||Friday’s Close Week Ending 9/2/2022||Weekly (+/-) Point Change 9/2/2022||% Change YTD Week Ending 9/2/2022|
|S&P Midcap 400||2,393.10||-107.14||-15.80%|
SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.
US Yields & Bonds
The continued tightness in the labor market helped push U.S. Treasury yields higher, with the two-year Treasury yield reaching levels not seen since late 2007. Traders I spoke with noted that stronger-than-expected Institute for Supply Management (ISM) manufacturing data, which showed steady expansion in the sector last month, aided the upward yield.
Investment-grade corporate bonds suffered from the weaker macro backdrop. Secondary trading volumes were below daily averages, and no new issuance occurred. The sell-off in Treasuries pressured high-yield bonds and bank loans as the market continued to assess the Fed’s hiking trajectory and its impact on growth. As expected, no new high-yield bond issues were announced this week, but several financing deals are anticipated after Labor Day.
Rising interest rates continued to hamper the municipal debt market, although munis fared better than Treasuries at the broad market level. While our municipal traders observed somewhat thin liquidity in the secondary market, they reported strong demand for this week’s approximately USD 1.8 billion primary market offering from Chicago O’Hare International Airport.
US Treasury Markets – Current Rate and Bi-Monthly Change
3 Mth +0.05 bps to 2.87%
2-yr: +0.18 bps to 3.39%
5-yr: +0.08 bps to 3.29%
10-yr: +0.15 bps to 3.19%
30-yr: +0.15 bps to 3.34%
SOURCE: FOR THE WEEK ENDING September 2, 2022. BLOOMBERG. YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. YIELD CHANGES ARE FOR ONE WEEK. PAST PERFORMANCE CAN NOT GUARANTEE FUTURE RESULTS.
Interesting News Overseas
Shares in Europe fell sharply on fears that central banks could tighten monetary policy aggressively for an extended period. Worries that Russia might stop natural gas supplies to Europe also weighed on sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.37% lower. Major indexes were mixed. France’s CAC 40 Index dropped 1.70%, and the UK’s FTSE 100 Index lost 1.97%. Germany’s DAX Index gained 0.61%. Italy’s FTSE MIB Index was little changed.
Core eurozone government bond yields, rose on hawkish central bank comments and record high inflation. Peripheral eurozone bond yields and UK gilt yields broadly tracked core markets.
The UK pound posted its steepest monthly drop versus the U.S. dollar since October 2016, three months after the Brexit referendum, as economic and political uncertainty in the country intensified during the ruling Conservative party’s election campaign to replace outgoing Prime Minister Boris Johnson. The pound fell more than 4% in August to USD 1.16. The pound also declined almost 3% relative to the euro.
Eurozone money markets were pricing in a roughly 80% chance of a substantial 0.75 percentage point rate hike by the European Central Bank (ECB) at its next meeting, after a chorus of hawkish comments by policymakers and data showing record inflation. At the Jackson Hole conference, Executive Board member Isabel Schnabel said that central banks should act “forcefully” to reduce high inflation, even at the risk of lower growth and higher unemployment, to minimize the risk of bad economic outcomes. Banque de France Governor François Villeroy de Galhau said the policy would need to remain tight for an extended period and favored “another significant step in September.” Policymakers quoted by Reuters, including German Bundesbank President Joachim Nagel, said the bank should again act decisively to subdue inflation, indicating that they favored another significant increase. However, ECB Chief Economist Philip Lane argued at a conference in Barcelona that borrowing costs should increase at a “steady pace” to allow any downward adjustment in inflation forecasts.
Japan’s stock markets fell over the week, with the Nikkei 225 Index down 3.46% while the broader TOPIX Index declined 2.50%. A hawkish outlook on U.S. interest rates dampened investor sentiment. Against this backdrop, the 10-year Japanese government bond yield rose to 0.24%, from 0.22% at the end of the previous week, amid a sell-off in global bonds. The yen plunged on expectations of continued monetary policy divergence between the U.S. Federal Reserve and the Bank of Japan (BoJ), which remains committed to maintaining ultralow rates.
The Japanese currency breached the JPY 140 level against the U.S. dollar for the first time since 1998. Japan’s Finance Minister Shunichi Suzuki acknowledged the somewhat high recent currency market volatility and its potential negative impact on the economy and financial conditions. Furthermore, he said that the government was prepared to take appropriate action to bring stability, working closely with monetary authorities in other nations.
While the weak yen has been very supportive of Japan’s competitiveness and a boon for the country’s exporters, it has also pushed up the cost of importing energy and food, increasing the burden on businesses and households. As a net energy importer, Japan is impacted by surging energy prices. With core inflation exceeding the BoJ’s 2% target for four consecutive months, the government has promised to take new measures to cushion the impact of rising food and energy prices.
This Week Ahead
Next week will be relatively quiet in the US, with ISM Services PMI, trade data, and wholesale inventories taking center stage. Investors will also keep a close eye on appearances from several Fed officials, including Fed Chair Powell, at the Cato Institute’s 40th Annual Monetary Conference on Thursday. On the corporate front, Apple will hold its Annual Event on Wednesday and is expected to unveil the iPhone 14. Markets in the US are closed on Monday for Labor Day. Elsewhere in America, the Bank of Canada is expected to deliver a 75bps rate hike, following a higher-than-expected 1% increase in July. It will also be interesting to follow: unemployment and trade figures for Canada; inflation and services PMI for Brazil; inflation and industrial production for Mexico.
Have a great week!
Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC
E: [email protected]
This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to [email protected]