S&P 500: 0.48% DOW: -0.30% NASDAQ: 1.66% 10-YR: 4.78%
Last Week on WallStreet - October 7th, 2023
Despite the S&P 500 and Nasdaq eventually recording a welcome gain after enduring weeks of lackluster performance, the past week proved to be highly volatile, with the indexes spending the majority of their time in negative territory. The first four sessions were dominated by anticipation of Friday's Bureau of Labor Statistics employment report, which was expected to shed light on the Fed's future monetary policy decisions. The final week's final session did not disappoint, offering investors an exciting day of market activity.
Following the initial release of the employment report, which revealed a significant upside surprise in payrolls, bond yields experienced a sudden spike, causing the equity market to plummet sharply. This reaction was driven by the perception that the strength in the labor market might prompt the Fed to adopt a more hawkish stance. However, upon deeper analysis of the report, more favorable details were uncovered, coupled with an acknowledgment of intensely oversold market conditions and a subsequent easing of yields in the bond market. These factors quickly led to a reversal of the market's downward trajectory. The coming sessions will be key in determining if Friday's strong finish was a fluke or a meaningful change from the recent bearish sentiment.
Beneath the surface, there were bifurcated results across sectors, but the outperformance of heavily weighted stocks propelled the S&P higher. Specifically, Technology (+2.7%) and Communication (+2.0%) sectors saw a resurgence in buying after facing recent challenges. On the other hand, Energy (-5.2%) experienced the most significant decline, while Staples (-3.1%) and Utilities (-2.9%) trailed behind.
Payrolls Grow Sharply in September - But Other Data Moderate
- The US economy added 336,000 jobs in September doubling the consensus estimate from Dow Jones for 170,000
- Wage growth moderated to 0.2% for the month and 4.2% versus last year, both below estimates
- Leisure (96,000), Government (71,000), and Health Care (41,000) added the most workers
- The moderate payroll growth seen in July and August was revised sharply upward
The key takeaway - Following months of labor market cooling, September's Bureau of Labor Statistics report exceeded expectations, displaying a renewed strength. The jobs market has significantly influenced the Fed's policy over the past year and change, raising the critical question: "Does this signal more hikes in the future?" Not necessarily. Diving below the surface, the report's underlying data actually demonstrate moderation in key variables. Wage growth, a primary concern for inflation, fell below expectations and continues its year-over-year downward trend. The unemployment rate and labor force participation rate remained steady, indicating a greater balance than what the headline number suggests. Undoubtedly, this report reflects robustness, but the details might offer more nuance as the Fed assesses the labor market's role in inflation moving forward.
US Economy Cools Off Slightly, ISM Finds, But Businesses Still Feel 'Positive'
- The ISM Services index fell slightly in September to 53.6% from 54.5% in August
- The production gage edged up to 58.8% while new orders declined sharply to 51.8%
- The ISM Manufacturing survey rose to 49.0% last month from 47.8% in August
- New orders and production rose to 49.2% and 52.5% respectively
The key takeaway - The most recent ISM report reveals a notable departure from the prior data trends observed over the past year. In this latest update, the services sector, which has been a bastion of economic strength, displayed signs of slowing down. Conversely, manufacturing businesses, which have faced significant challenges since the easing of Covid restrictions, exhibited a resurgence in activity. While the absolute levels of the indicators still indicate growth in the services economy and contraction in manufacturing, this shift could mark the onset of a new trend, paving the way for a rebalancing from both sectors. Such a shift would be a positive development, as the robust expansion of the services sector has contributed to inflation, despite the hardships endured by manufacturers.
Fed's Bid to Avoid Recession Tested by Yields Nearing 20-Year Highs
- The 10-year Treasury yield rose more than half a percentage point over the past month eclipsing 4.75%
- The highest level since 2007
- Higher rates tighten monetary conditions in the economy and apply stress to financial markets
- Fed officials have not pushed back against this sharp elevation in yields, more or less maintaining the stance from the last FOMC meeting
The key takeaway - In the past month, the sharp rise in yields, particularly in the middle and longer segments of the curve, has been dramatic. Following the release of the FOMC's projections signaling a prolonged period of elevated rates before considering cuts, markets have rapidly adjusted to factor in these higher rates and the potential economic repercussions they might bring. In the short term, this surge in yields could stress financial institutions, reminiscent of the Silicon Valley incident earlier this year. Looking ahead, these considerably higher rates may diminish the demand for borrowing from both consumers and companies, thus placing a constraint on expansion to some extent. This aligns with the Fed's objective to curb inflation, and in a way, the market is doing the Fed's job for them. Striking the right balance between achieving that goal while avoiding these short- and long-term consequences will be a delicate tightrope act.
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