U.S. markets ended higher this week amid continued improving market sentiment. Moreover, international markets ended higher amid investor expectations for lower interest rates next year. The Russell 2000 rebounded this week from the index’s negative return last week following the index’s solid rebound two weeks ago as small cap fundamentals remain questionable amid cheap valuations.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors increased slightly from 42.6% to 43.8%, above the historical long-term average of 37.5%. This week bearish investors increased to over 28% from 27.2%, still below the historical average. Neutral investors declined to 28.1% from 30.2%, below its historical average. The overall report continues to reflect strong improve bullish market sentiment as markets have rebounded.
Fixed Income Higher
The Bloomberg Aggregate Bond Index rebounded this week from last week’s decline following Powell’s comments. In addition, high yield bonds gained from lost ground last week.
The rating agency Moody’s downgraded its credit rating outlook on U.S. government debt from neutral to negative. The company cited wide budget deficits and political polarization as reasons for the downgrade. Since then, Treasury yields are generally lower (prices higher) across the curve.
However, interest expense on debt recently passed $1 trillion and is expected to keep growing. Moreover, Treasury will need to refinance over $9 trillion in government bonds maturing through the end of 2024. The bond market’s collective shrug for the outlook change affirms that rating agencies are catching up to the fiscal policy challenges that the bond market has been pricing in for several quarters. However, until the U.S. government gets its fiscal house in order, we’re likely going to see additional downgrades.
Commodities Mixed
Oil prices finished lower for the fourth consecutive week on global demand concerns. Weak Chinese economic data also raised further fears of faltering demand. Moreover, refiners in China requested less supply from Saudi Arabia for next month. Precious metals increased, with gold rebounding from two weekly declines.
Economic Weekly Roundup
October CPI
Last month’s inflation report came in cooler than economists expected. Core inflation rose 0.2% from a month ago as housing costs, insurance, and medical care increased in October. Hotel prices fell in October, likely on the heels of declining demand for travel. Air fares fell in October as fuel costs declined and competition among airlines put downward pressure on tickets. The annual rate of core inflation decelerated to 4%, the smallest rate since mid-2021 and should likely keep the Fed from raising interest rates at next month’s meeting.
October Retail Sales
Retail sales fell -0.1% in October, but excluding the drag from autos, sales grew modestly. The control group, which feeds into the GDP calculations, rose 0.2% month over month after the previous month was revised higher. Upward revisions to September will make it more difficult for the economy to sustain the momentum through Q4. Online shopping remains strong as consumers stay committed to ecommerce, certainly a good omen for holiday sales.
Rising Delinquencies
Serious delinquencies are rising for both auto loans and credit cards. Over 6% of card balances are over 90 days past due. This is the highest rate since 2011 when the economy was emerging from the Great Financial Crisis. Not surprisingly, serious delinquencies in credit card balances are higher for auto loans, but for auto loans, the current delinquency rate is the highest since 2010. The difference today is the penalties for those past due balances are much greater than 13 years ago when interest rates were much lower.
Weekly Employment Report
Initial claims came above the prior week as well as analyst expectations. Moreover, the same occurred with continuing claims for the fourth straight week. We believe the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
Week Ahead
The following economic data is slated for the week ahead:
Monday: Leading Indicators (Oct)
Tuesday: Existing home sales (Oct)
Wednesday: Weekly initial and continuing unemployment claims, durable orders (Oct), FOMC Minutes
Friday: PMI composite (Nov), S&P Global PMI Manufacturing and Services (Nov)
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