Market Summary
U.S. stocks broadly declined this past week as an unanticipated jump in long-term interest rates spooked equity investors. Higher interest rates mean higher borrowing costs both for consumers and businesses that can cut into corporate profit margins and consumer discretionary spending. Debt-fueled growth companies felt the sting of rising rates the strongest. For the week, the tech-laden NASDAQ index slid the most with a drop of -3.2%, while the S&P 500 lost about -0.95% and the Dow ended about even. The bond selloff and consequent jump in long-term yields has been driven at least partially by expectations that the Federal Reserve will be more aggressive in hiking short-term rates in response to strong economic data, to keep the economy from overheating. The U.S. Treasury curve has steepened as the 10-year Treasury yield, which closed at 3.23% on Friday, increased by 5.9% this past week and is up almost 13% this month.
Positive economic news, including a large gain in the ADP September employment report earlier last week, ironically has been the catalyst for a jump in interest rates and a subsequent slide in equity returns. Although Friday’s report of nonfarm payrolls added to the economy in September of 134,000 was below expectations of 185,000, the slowdown has also been partially attributed to Hurricane Florence and the figures for July and August were revised sharply upward. The unemployment rate also dropped more than expected to just 3.7%, the lowest since December 1969.
Despite the recent bond and equity selloff, Federal Reserve Chairman Jerome Powell said in an interview at an event in Washington hosted by The Atlantic magazine and the Aspen Institute that interest rates are still accommodative and “a long way from neutral” (a rate that is neither accommodative or restrictive). He also stated that the Fed is gradually moving toward a neutral policy rate and may go beyond that level at some point, into restrictive territory, which investors hope will not cut off the current bull run. Powell continued to talk up the strength of the economy, noting that the expansion can continue for some time yet.
The coming week will provide important indications on the rate of inflation as well as the unofficial kick-off of third quarter corporate earnings season on Friday.
Economic Highlights:
Manufacturing: September non-manufacturing ISM came in at 61.6, better than the 58.0 consensus and the prior month’s 58.5 reading. Business activity and new orders components were stronger and the employment index rose sharply to 62.4 from 56.7. Respondent commentary noted that while business is strong and economic outlook good, trade-related logistics and material costs are pressuring corporate earnings.
Wage Growth: Average hourly earnings increased in line with expectations with a 0.3% increase month-over-month in September, translating to 2.8% growth year-over-year. Investors will continue to watch this indicator closely to see if the tightening labor market feeds into higher wages, which in turn could spark further inflation.
US Economy – The Week Ahead
Tuesday 10/9/2018
- NFIB Small Business Optimism Index – Consensus Estimate: 107.0 (-1.7% MoM), Prior Month: 108.8 (0.8% MoM)
Wednesday 10/10/2018
- U.S. Producer Price Index (PPI) Year-Over-Year – Consensus Estimate: 2.7%, Prior Month: 2.8%
- Wholesale Inventories Month-Over-Month Growth – Consensus Estimate: 0.8%, Prior Month: 0.8%
Thursday 10/11/2018
- Initial Jobless Claims – Consensus Estimate: 205,000 (-1.0% WoW), Prior Week: 207,000 (-3.3% WoW)
- U.S. Consumer Price Index (CPI) Year-Over-Year – Consensus Estimate: 2.4%, Prior Month: 2.7%
Friday 10/12/2018
- U.S. Import Price Index Month-over-Month Growth – Consensus Estimate: 0.1%, Prior Month: -0.6%
- U.S. Export Price Index Month-over-Month Growth – Consensus Estimate: -0.2%, Prior Month: -0.1%
- University of Michigan Consumer Sentiment Survey (Preliminary) – Consensus Estimate: 100.3 (0.2% MoM), Prior Month: 100.1 (4.1% MoM)
