Last Week in Review – October 30, 2023 – from Stephen Colavito
The major U.S. stock benchmarks finished lower for a second straight week, as market sentiment was dented by mixed corporate earnings reports and concerns about higher interest rates—highlighted by the yield on the benchmark 10-year U.S. Treasury note briefly breaching the 5% level for the first time in 16 years.
It was a busy last week for quarterly earnings reports, with nearly a third of the S&P 500 Index due to report. Investors seemed particularly focused on results from Amazon.com, Google parent Alphabet, Facebook owner Meta Platforms, and Microsoft, all of which are members of the mega-cap technology-focused group of stocks known as the Magnificent Seven that helped drive positive market results earlier in the year.
Although most metrics reported by the companies showed solid growth and exceeded consensus expectations, markets seemed to pounce on indications of rising expenses, which weighed on shares. Amazon’s report, released after the market closed on Thursday, appeared to receive the most positive reaction, and shares of the company rallied on Friday. Market participants may have been hoping for stronger results from the tech giants to help offset recent concerns about interest rates and geopolitical risks.
US - MARKETS & ECONOMY
Economic news during the week was highlighted by a better-than-expected gross domestic product report, which showed that the U.S. economy grew at an annualized pace of 4.9% in the third quarter, led by strong consumer spending. It was the best showing since the end of 2021 and more than double the level seen in the second quarter. Other data also appeared benign, as home sales reached a 19-month high and S&P Global’s flash U.S. Composite Purchasing Managers’ Index (PMI) ticked up from September.
Meanwhile, the core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, provided mixed evidence on whether inflation is moderating. Monthly, core PCE—which excludes volatile food and energy costs—increased to 0.3% in September from 0.1% in August, although the year-over-year measure ticked down to 3.7% in September from 3.8% previously. Although the latest data showed inflation remaining well above the Fed’s 2% long-term inflation goal, the central bank is widely expected to hold rates steady at its October 31-November 1 policy meeting.
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
After crossing the 5% threshold on Monday, the yield on the 10-year U.S. Treasury note trended lower and traded around 4.8% at the end of the week. Tax-exempt municipal bonds saw continued outflows industry-wide, and higher-than-average net supply continued to represent headwinds. However, municipal traders noted that many new deals were well received.
In the investment-grade corporate bond market, issuance was lower than expected, and all deals were oversubscribed. In the high-yield bond market, traders noted that buyers of higher-quality securities remained active, and investors with cash on hand appeared to be looking for values amid market weakness.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth 0.00 bps to 5.45%
2-yr: -0.07 bps to 5.00%
5-yr: -0.10 bps to 4.76%
10-yr: -0.08 bps to 4.83%
30-yr: -0.07 bps to 5.01%
INTERESTING NEWS OVERSEAS
In the local currency, the pan-European STOXX Europe 600 Index closed 0.96% lower due to the uncertainty surrounding interest rates, the economy, and Middle East conflicts. Major stock indexes experienced a decline, with Germany's DAX dropping 0.75%, France's CAC 40 Index slipping 0.31%, and Italy's FTSE MIB dipping 0.25%. The UK's FTSE 100 Index lost 1.50%.
Furthermore, Eurozone government bond yields slightly eased after the European Central Bank (ECB) decided to maintain short-term interest rates on hold. This led to an expectation that rates have finally peaked in the eurozone. The 10-year German bund yield fell to around 2.84%, while the 10-year Italian government bond yield slipped to approximately 4.81%.
After increasing interest rates 10 consecutive times, the ECB left its key deposit rate unchanged at 4.0% and reiterated that maintaining this level for a long enough period would help bring inflation down to its medium-term target of 2%. The Governing Council said previous tightening of monetary policy was already spreading “forcefully into financing conditions” and was “increasingly dampening demand.” ECB President Christine Lagarde said at a press conference that the eurozone economy was “weak” and would remain so “for the remainder of this year.”
The decline in eurozone business activity accelerated at the start of the fourth quarter, according to purchasing managers’ surveys compiled by S&P Global. An early estimate of the HCOB Eurozone Composite Purchasing Managers’ Index (PMI), including the manufacturing and services sectors, fell more than expected to 46.5 from 47.2 in September. This latest reading, a 35-month low, marked the fifth consecutive month that the PMI was less than 50, the level that corresponds with shrinking business output. The PMI for the manufacturing sector was the deepest into contractionary territory, and the slowdown in services quickened.
The latest leading indicators pointed to a challenging economic environment in Germany, with the composite PMI compiled by S&P Global remaining in contractionary territory and falling to a two-month low.
Japan’s stock markets eased over the week, with the Nikkei 225 Index down 0.86% and the broader TOPIX Index little changed. Rising bond yields and geopolitical tensions weighed on market sentiment at the start of the week. Still, investor bottom-fishing at the lows, a rebound in technology stocks, and a fresh dose of Chinese economic stimulus helped local stock markets recoup their losses.
Moves in the foreign exchange and bond markets and a pickup in inflation fueled intense speculation of potential intervention by the authorities and a possible adjustment to the yield curve control policy by the Bank of Japan (BOJ) at its upcoming meeting.
The yield of the 10-year Japanese government bond rose to a 10-year high of 0.87%, approaching the central bank’s upper bound of 1.0% at the start of the week. The BOJ then conducted an unscheduled bond-purchase operation to curb rising sovereign debt yields, buying five- to 10-year bonds and 10- to 25-year notes in the fifth unscheduled operation since July. According to some reports, markets speculate that policymakers could debate proposals, including another increase in the upper bound, revisions to BOJ market operations, and dropping the mention of a desired target range for yields of plus or minus 0.5%, as that level has now been exceeded.
THE WEEK AHEAD
Earnings reports will continue at full force next week, with investors anticipating updates from major companies, including Apple Inc, Airbnb, Advanced Micro Devices, Amgen, Caterpillar Inc, Etsy, Eli Lilly and Co, Liberty Global, McDonald's Corp, Moderna, Novo Nordisk, PayPal, Pinterest, Pfizer, Starbucks. Additionally, all eyes will be on the US FOMC meeting, where policymakers are expected to maintain interest rates; the focal points will include expectations for the December meeting and any clues regarding the conditions required for the FOMC to initiate rate cuts in the coming year. Turning to economic data, the US jobs report will likely reveal a 172K increase in non-farm payrolls for October, far below the 336K jobs in September. The unemployment rate is forecast to hold steady at 3.8%, with monthly wage growth expected to rise to 0.3% from 0.2%. Other releases to watch include October's ISM PMI surveys, JOLTs job openings, Q3 employment cost index and productivity, Case-Shiller home prices, ADP Employment Change, factory orders, and regional activity indexes such as the Dallas Fed Manufacturing Index and Chicago PMI.
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
This message is informational 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. San Blas Advisory is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, available upon request.