What happened in the markets - 4-8 Sep 2023

Introduction

The stock market has been on a rollercoaster ride this week! Despite some positive economic data from the U.S., stocks took a hit. The reason? Weak economic data from Europe and China, which has reignited concerns about a global slowdown. 🌍

In other news, the U.S. dollar flexed its muscles against a basket of currencies. This strength is a testament to the robust U.S. economy, especially when compared to the slower growth we're seeing overseas. 💪

Looking ahead to next week, all eyes will be on consumer and producer price inflation. This comes as the Federal Reserve (Fed) enters its media blackout period before its next policy decision later in the month. The general consensus in the market? The Fed will likely keep rates steady at the next policy meeting. 🏦

As we near the end of the second-quarter earnings season, the S&P 500 Index is on track for a third consecutive quarter of year-over-year (YOY) earnings declines. 😬

Key Takeaways

A couple weeks back we got some not-so-hot job numbers, but last week's data paints a prettier picture of the economy. Productivity and ISM services figures are both looking good, which means are still growing.
The yield curve is getting steeper and stuff, and those investments that go up and down with the economy are doing pretty well lately. All of this seems to be pointing towards a bigger bull market, you know?
Analysts are not totally sure everything's gonna be cool just yet. The Fed's decisions are gonna depend on what's happening with employment and inflation, and that's gonna affect what happens in the market. Analysts are expecting the consumer price index (CPI) report this week to show that inflation is still chillin' out. But things could get complicated if oil prices keep going up and housing costs stay high, and that could make the market jump around a bit.

Jobless claims fall to lowest level since February

Thursday's weekly jobless claims report came in with a pleasant surprise, showing a stronger labor demand than anticipated. Despite a slight increase in the unemployment rate from 3.5% to 3.8% in August, the number of Americans applying for unemployment benefits in the previous week dropped to 216,000. This is the lowest level we've seen in six months! Continuing claims also took a dip, falling to 1.68 million, the lowest since mid-July. What's the impact of these jobless numbers? Our traders have noticed a surge in short-term bond yields. The yield on the two-year U.S. Treasury note even briefly crossed back above the 5% threshold on Thursday afternoon. The tax-exempt municipal bond market started the holiday-shortened week on a quiet note. Market participants were on the lookout for large new issues from California and the Port Authority of NY/NJ. These new deals hit the market on Wednesday and caused a bit of a stir in the secondary market as they were absorbed. The secondary market weakness continued into Thursday, causing yields on intermediate AAA municipal bonds to rise.

Good news for the economy remains bad news for stocks

The S&P 500 Index took a bit of a hit, largely due to a decline in Apple (AAPL), the most heavily weighted stock in the index. The reason? News broke out that Chinese government employees would no longer be able to use iPhones. Talk about a blow! 🍏 Adding to the gloom, reports surfaced that the upcoming iPhone 15 will be significantly more expensive than current models. This news didn't sit well with investors, and understandably so. 💸 Chipmakers like NVIDIA also experienced declines, adding more weight to the indexes.

Source: Morningstar Direct, Edward Jones. Past performance does not guarantee future results. Cyclical sectors include financials, materials, industrials, consumer discretionary and energy. Defensive sectors include consumer staples, health care and utilities.

Cyclical investments have been making a significant turnaround since mid-year, reflecting a surge in risk appetite and optimism. This is largely due to the resilient economic and corporate-profit growth, which has helped to alleviate fears of a banking crisis. After a brief pullback in early August, which saw a rally in more defensive areas, cyclicals are once again outperforming. The broader stock market, represented by the S&P 500, has seen a 7% gain since the start of May. This growth has been led by the more economically sensitive sectors, indicating a more positive outlook for growth. While it's true that this year's leadership has been somewhat narrow, with mega-cap technology names recording sharp gains, the fact that cyclicals are leading the charge is a good sign. It would be more concerning if defensive sectors were driving the market, as this would suggest underlying worries. In 2013 and 2016-2017, strong market returns were backed by outperforming cyclicals. The recent trend could be another tick in the optimism column. However, this doesn't mean we should let our guard down. Analysts anticipate signs of economic slowing as we approach the end of 2023. But for now, the market fundamentals are not showing significant deterioration. This year's market gains are being validated by a more favourable cyclical outlook.

Despite the market being closed on Monday for Labor Day, the week was not short of economic signals. The economic calendar, although not particularly heavy, seemed to drive sentiment by generally surprising on the upside. 📈

The standout was the Institute for Supply Management's report on August services sector activity. It jumped unexpectedly to its highest level since February. The report indicated that new orders were growing at a faster pace, although order backlogs fell sharply, and inventories had risen considerably. Export orders also remained healthy.However, worries grew during the week about a sharp slowdown in the Chinese economy. 🇨🇳

By the way, the markets were closed on Monday for Labor Day.

Steepening yield curve reflects potential for a soft landing

Yield Curve: 10-yr Rates Minus 2-yr Rates

*Source: FactSet. 10-year and 2-year U.S. Treasury yields.*

The yield curve has been acting weird lately. Basically, the short-term rates have been higher than the long-term rates, which is not normal. This happened because the Fed was being too aggressive in trying to fix things. But then, things got better for a bit and the rates went down. But then, the economy started doing well and rates went up again. Recently, the curve has started to even out a bit, with short-term rates going down and long-term rates going up. This is good news because it means the economy is doing well and we might be heading towards a bull market for stocks. However, it doesn't mean that we're completely safe from a recession. In fact, in the past, when the curve started to steepen like this, it was right before some pretty big recessions. But, usually, when the curve starts to steepen like this, it means that we're at the bottom of a bear market and we're starting to head towards a new bull market. So, if we want the market to keep growing, we're going to need the yield curve to go back to normal (short-term rates lower than long-term rates), but that's not going to happen until the Fed starts cutting rates, which probably won't happen until 2024.

Stocks on the move

Here are some stock price moves that happened recently:

DocuSign (DOCU) shares went down almost 4% even though they reported earnings that were slightly better than expected.
First Solar (FSLR) shares went up over 1% after Deutsche Bank said it was a good idea to buy the stock because people want solar panels.
Gilead Sciences (GILD) shares went up about 2.5% after Bank of America said it was a good idea to buy the stock because the company is doing well and people don't appreciate it enough.
Kroger (KR) shares went up over 3% because the company did better than people thought and wants to sell some stores so they can finish a deal with another company.
Snowflake (SNOW) shares went up about 3.6% because people think it's a good idea to buy the stock because the company is making things that use fake intelligence.

What to Expect in the Markets This Week

Inflation Readings For August
ECB Interest Rates
AAPL’s Annual Fall Event
Auto Labor Negotiations

This week we've got some cool stuff coming up: We're gonna find out the latest inflation readings for August, plus check out the retail sales figures from last month. And those bigwigs over at the European Central Bank (ECB) are gonna let us know what they're gonna do with interest rates. Plus, we've got Apple's annual fall event where they usually show off their newest products. Also, we might wanna keep an eye on those auto labor negotiations 'cause there's a big contract deadline coming up soon.

The Latest Inflation Readings

So we've got the latest inflation readings coming our way next week, starting with the Consumer Price Index (CPI) on Wednesday. Word is, the CPI might have gone up by 0.4% last month - that's the fastest monthly increase since January! On an annual basis, consumer prices were probably up by 3.4%, which is a faster rate compared to July's 3.2%.

But wait, there's more! The core CPI, which doesn't include volatile food and energy prices, was likely up by 0.2% from a month earlier or 4.3% year-over-year - that's down from July's 4.7%. This would mark the smallest annual increase in two years. Pretty cool stuff huh?

On Thursday, we're also expecting the Bureau of Labor Statistics (BLS) to issue the Producer Price Index (PPI), which tracks inflation from the standpoint of manufacturers and wholesalers. We're guessing producer prices probably rose by 0.4% last month - higher than July's 0.3%. They were likely up by 1.3% on an annual basis, which is higher than July's 0.8%.

ECB Policy Meeting

The big guns at the European Central Bank (ECB) are set to huddle up this Thursday to discuss all things finance. The word on the street is that they're likely to keep the interest rates steady, given the aggressive hikes we've seen over the past year. Sounds familiar? Yep, they're on the same mission as the U.S. Federal Reserve - taming the inflation beast.The ECB has been on a roll, pushing their benchmark deposit facility rate to a whopping 3.75% - a level we haven't seen since 2001! To put things into perspective, this rate was chilling at a super low -0.5% at the start of 2022. Talk about a leap!

Apple Hosts Its Annual Fall Event

Apple's fall event is just around the corner, happening this Tuesday. Rumor has it, they're about to unveil some exciting new gadgets. We're potentially looking at the iPhone 15, iPhone 15 Pro, the Apple Watch Series 9, and Ultra 2, plus a bunch of other cool devices and accessories. Stay tuned, folks!

Auto Labor Union Negotiation Deadline

Time is running out for the United Auto Workers (UAW) union and those Detroit big shots Ford (F), General Motors (GM), and Chrysler owner Stellantis (STLA) to come to a labor agreement. If they don't reach one by Thursday, when the four-year labor contract is up, the union might go on strike. And get this, like 97% of members said it's a go.

August Retail Sales

This Thursday, the U.S. Census Bureau is dropping the latest retail sales figures for August. Retail sales aren't adjusted for inflation, but it looks like they went up by 0.4% last month. That's a bit slower than July's 0.7%, but still a solid fifth month in a row of gains. Looks like people are still spending like crazy despite higher loan rates and inflation.