What’s Up In The Market

Week Ending September 15, 2023

Weekly Market Summary

Global Equities: Stocks rallied but faded late in the week on Friday when $4 Trillion in options expired. Also weighing on stocks was news of striking autoworkers and more government dysfunction as the national debt is once again being held hostage. The S&P 500 ended the week –0.1%, the Nasdaq finished down -0.4%, and the Dow Jones Industrial Average salvaged a 0.1% weekly gain. Developed International Markets outperformed with a 1.4% gain as the European Central Bank (ECB) signaled rate hikes may be finished. Emerging Markets also closed out the week positive with a 1.1% gain.

Fixed Income: 10-Year Treasury yields pushed higher, ending the week near 4.32%. European bond yields fell sharply as the ECB announced a surprise rate hike while also hinted rates have reached a sufficiently restrictive level. High yield bonds continued to outperform, with the Bank of America Merrill Lynch US High Yield Index hitting a new year-to-date high on Thursday.

Commodities: The recent uptrend in oil prices continued, pushing US West Texas Intermediate prices above $90 on Friday, the highest price since November 2022. Saudi production cuts, which have removed 2.5 million barrels per day from the market, are the most obvious reason for the price increases. With the reduction in place through year end, Q4 will likely see a 1.1 million barrel per day shortfall, which is likely to exert additional upward pressure on prices.

Weekly Economic Summary

Headline Inflation Turns Higher: Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data turned higher monthly, with CPI coming in at 0.6% on the headline number and 0.3% for the Core (Ex-food and energy). Year-on-year CPI ticked up from 3.6% to 3.7% and Core fell from 4.7% to 4.3%. The higher headline reading was largely attributed to increases in energy and transportation costs, while core goods prices declined, and housing showed some signs of softening. Producer prices also reflected the rising costs of energy, up 0.74% monthly for a headline increase of 1.6% while Core PPI was up 0.3% for the month and 3.0% annually. Overall, the market took the data in stride, as the recent trends are still moving favorably and the added burden of student loan payments resuming should put some downward pressure on discretionary spending.

Autoworkers Strike: The United Auto Workers union officially went on strike this week, as 13,000 autoworkers began picketing in Michigan, Ohio, and Missouri. Depending on the outcome and duration of the strikes, the impact could spread throughout the economy. UAW is seeking a 36% pay raise (over four years), which could contribute to inflation via both higher wage and automobile costs. The lost productivity due to the strike is estimated to cost the US economy roughly $500 million per day. Among the UAW complaints are stagnant wages and sky-high executive compensation. Accounting for inflation, average hourly wages for autoworkers are down -19.3% since 2008. Meanwhile, the CEOs of Ford and GM earned 281 times and 362 times their respective median employee salaries in 2022.

Retail Sales Remain Strong: The persistent theme this year has been the strength of the US consumer, which has enabled the US economy to weather the Fed rate hikes and maintain a surprisingly strong GDP growth rate. As student loan payments resume and summer travel winds down, many are anticipating a reduction in consumer spending. Thus far, that theory has yet to materialize, with August retail sales up 0.6%, higher than July’s revised 0.5% and triple economists’ expectations of 0.2%. Automobiles were not a major contributor to the data, although gasoline was a major expense.

Chart of the Week

The Chart of the Week is the ICE Bank of America US High Yield Option-Adjusted Spread (OAS), which is a measure of the default risk being priced into US bonds rated below investment grade. The OAS on US high yield bonds has fallen to 3.78%, its lowest level since April 2022, thanks to resilient economic data that has caused recession expectations to diminish greatly in recent months. Therefore, despite relatively higher borrowing costs due to Fed rate hikes, the market is not demanding significant premium to hold high yield bonds, as the expectations are that even the riskiest US companies will be able to meet their debt obligations. High yield has been a strong outperformer in fixed income year-to-date and is showing no signs of weakness yet.

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