U.S. markets ended mostly higher this week amid improving market sentiment. Seasonality is presently a bullish talking point for equities after three straight month of losses and a volatile October. According to Bespoke Investment Group, historically (going back to 1945), November has been the third best month of the year with an average gain of 1.47% and positive returns two-thirds of the time. International equities finished lower over continued economic concerns, however many European companies reported better-than-expected results.
The Russell 2000 had a negative week after last week’s rebound as investors are concerned about small cap fundamentals. The earnings outlook for small-caps has been significantly more challenging as the companies grapple with higher inflation and higher rates.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors jumped from over 29% to 42.6%, which is above the historical long-term average of 37.5%. This week bearish investors plummeted to over 27%, below the historical average. Neutral investors increased to over 30% from 25.4%, near its historical average. The overall report reflects strong improve bullish market sentiment amid weak market results. In addition, the week-over-week change in the AAII Bull-Bear spread is the highest since January 2009.
Fixed Income Mostly Lower
The Bloomberg Aggregate Bond Index declined this week following Powell’s comments. Thursday’s very weak $24B auction of 30 year Treasuries also affected this week’s Fixed Income returns. In addition, high yield bonds lost ground this week.
Bank Balance Sheets Impacted by Falling Fixed Income Assets
The most interesting parts of note from the October Senior Loan Officer Opinion Survey were the special questions about why lenders changed standards. Here are highlights from Wednesday’s report:
The shrinking demand for commercial and industrial loans for all firms implies lower business investment in the coming quarters. This is a bearish sign on capex.
Auto loan demand buckled under the high cost of borrowing.
Lenders were concerned about deposit outflows and the subsequent pressures on margins because of this environment.
One reason lenders cited for tightening lending standards was the decline in market value of fixed income assets.
The auto sector is often a leading indicator of the economic cycle, and the current environment is consistent with a slowdown. Additionally, lenders are concerned about the falling market value of their bonds and the stress induced from the quick rise in interest rates. However, the recent fall in rates will likely take off some of the pressure.
Oil prices finished lower for the third 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 declined, with gold on its way to a second weekly fall. Traders are concerned about Federal Reserve Chair Jerome Powell comments that the central bank is ‘not confident’ it has done enough to curb inflation.
Economic Weekly Roundup
Federal Reserve Chairman Powell spoke with the IMF this week. He stated that the economy has not likely felt the full impact of the past rate hikes, calling for policy makers to proceed carefully. Moreover, Powell issued a warning to investors who believed in rate cuts next year. The Fed will be true to its mandate and hike further should inflation reaccelerate. The main reason markets are jittery is the Chairman warned investors not to be misled by the “head fakes” of a few good months of data.
Australian Retail Sales
Australian retail sales grew 0.9% month-over-month, continuing the growth seen last month. The country is one of the stabilizers within the region dominated by China and Japan. Although economic activity is expected to remain in positive territory through the remainder of 2023, its pace should slow.
French Manufacturing Report
French Manufacturing PMI in October fell 1.4 points to 42.8 from shrinking demand from traditional trade partners in Europe. Increasing input prices and greater calls for labor action also worked to slow activity. Investors should know that international equities pose a relatively greater risk than domestic markets.
Inflation expectations over the next 12 months rose for the second consecutive month, reaching 4.4%, the highest since April. Investors must grapple with the risks of inflation expectations becoming unanchored. Consumer sentiment dipped to a six month low and likely signals a forthcoming dip in consumer spending. Long-run inflation expectations rose to 3.2%, matching the temporary spike back in 2011. Clearly, this recent spike will create a stir at the Fed.
Weekly Employment Report
Initial claims came in below the prior week and analyst expectations while continuing claims came in above economists’ consensus expectation as well as the prior week for the third second 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.
The following economic data is slated for the week ahead:
Tuesday: Consumer Price Index (Oct), hourly earnings (Oct), average workweek (Oct)
Wednesday: Producer Price Index (Oct), retail sales (Oct), business inventories (Oct)
Thursday: Weekly initial and continuing unemployment claims, export/import price index (Oct), capacity utilization (Oct), industrial production (Oct), manufacturing production (Oct), NAHB Housing Market Index (Nov)
Friday: Building permits (Oct), housing starts (Oct)
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