Your Weekly Update for Monday, February 27, 2023.
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Markets ended down last week. The Dow Jones Industrial Average fell 2.99% to 32,816.92 while the S&P500 ended down 2.67% to 3,970.04. The Nasdaq Composite fell 3.33% to 11,394.94. The annual yield on the 30-year Treasury rose 5.0 basis point(s) to 3.938%.
Economic data for the holiday-shortened week included U.S. GDP data for Q4 that stayed solidly positive but with a slight downward revision, mixed to improved housing data, decent jobless claims, and stronger consumer sentiment. However, higher PCE inflation was interpreted negatively.
Global equities lost ground last week as higher inflation readings continued to sustain assumptions for tighter central bank policy. Bonds suffered during the week as well, due to the same factors elevating interest rates. Commodities were mixed with crude oil little changed, but natural gas prices seeing some supply-driven recovery.
(0/-) The second release of U.S. GDP for the fourth quarter of 2022 showed a revision downward of -0.2% to 2.7%, despite consensus expectations for no change. The differential was largely due to a decline in personal consumption, which fell from an annualized 2.1% to 1.4%; on the other hand, business fixed investment remained negative, but was revised up by a few percent. The core GDP price index increased by nearly a half-percent to an annualized rate of 3.9% in Q4, reflecting still-robust inflation impulses.
According to the Atlanta Fed’s GDPNow tool, expected economic growth for Q1-2023 has crept up to 2.7%, based on more recent indicators. This is in contrast to the Blue Chip economist survey, showing a median of around 0% (within a band of estimates ranging from roughly -1.5% to +1.0%). Per GDPNow, the expected gain consists of higher expected consumer spending, but also nonresidential fixed investment, and net exports; residential investment and private inventories continue to drag. This again conflicts with earlier calls for a recession in 2023, which have started to fade, replaced with higher hopes for a soft landing. Or, at least, a postponement of a recession until late in the year or even 2024. However, there remains a lot of manufacturing data to be released between now and then that could tip the scales more decisively.
(0) Personal income for January rose 0.6%, below the 1.0% expected, with some impact of inflation adjustments in tax brackets for the new year oddly enough. Personal spending rose 1.8%, ahead of the expected 1.4%. These both led to a personal savings rate of 4.7%. On a year-over-year basis, income and spending increased 6% and 8%, respectively, with inflation taking a good chunk of those nominal numbers, leaving the ‘real’ results far lower.
Speaking of inflation, the PCE headline and core price index each rose by 0.6% for the month, each about a tenth above expectations. Year-over-year, headline prices were up 5.4%, while core gained 4.7%—both continuing to run well above the Fed’s 2.0% target. From a seasonal standpoint, January was expected to bring some ‘extra’ inflation simply due to the turn of the year effect, a time when some price adjustments are scheduled for Jan. 1, more so than other times of the year. Regardless, inflation continues to run hotter than the Fed would like, pushing the potential for higher rates in 2023, perhaps elevating the terminal rate by up to another half-percent by mid-year. Disinflation does seem to be happening globally, but not as rapid of a pace as policymakers would have hoped by now.
(+) New home sales in January rose by a sharp 7.2% in January to a seasonally-adjusted annualized rate of 670k units. This matched the December growth rate after revisions, and surpassed the 0.7% expected. Gains in the South offset small declines elsewhere in the U.S. However, sales nationwide remain down -19% year-over-year, with the months’ supply inventory measure falling to 7.9 (down -0.8 for the month). The median new home price came in at $427,500, which is down -0.7% from the year prior, demonstrating the negative turn prices have now taken.
(-) Existing home sales for January fell by -0.7% to a seasonally-adjusted annualized rate of 4.00 mil., below the consensus estimate calling for a 2.0% increase. This was entirely driven by single-family homes, with gains in the West and South offsetting declines in the Midwest and Northeast. Nationally, sales were down -37% on a year-over-year basis, and Jan. represented a 12-year low for the series. The median home price remained a still-positive 1% higher than a year ago at $359,000, although price growth has sharply decelerated in recent months. Inventory remained unchanged from the prior month at 2.9 months’ supply, but well up from the 1.6 figure from a year ago, yet homes remain on the market for longer than they did over the past year. Per the NAR, affordability remains a significant issue, with price declines more dramatic in expensive cities, in a process of ‘bottoming out,’ with listings rising. It was also noted that buyers are experiencing better negotiating power. Housing industry folks tend to be a bullish lot, so mentions of challenges are often paired with sunnier skies right around the corner. However, much of this is of course dependent on the path of the economy and rate policy. Another significant issue on the inventory side is that many homeowners have either purchased or refinanced into low mortgage rates over the past decade, with sticker shock of a new mortgage price keeping potential movers at bay.
(+) The final Univ. of Michigan index of consumer sentiment for February rose by 0.6 of a point to 67.0, surpassing the 66.4 level expected. Assessments of current conditions fell by -2 points, while expectations for the future rose by over 2. Inflation expectations for the coming year ticked down by -0.1% to 4.1%, while those for the next 5-10 years were unchanged at 2.9%. It was noted that uncertainty surrounding inflation remains high for both timeframes. Interestingly, respondents with stock portfolios tended to be happier than others, with the early-year bullish rally (until recently) helping the mood.
(+) Initial jobless claims for the Feb. 18 ending week fell back by -3k to 192k, below the 200k forecast. Continuing claims for the Feb. 11 week declined by -37k to 1.654 mil., below the 1.700 mil. expected. By state, KY, PA, and NJ saw increases, while no other states saw significant movement. As has been the case for weeks, it’s possible and likely that seasonal adjustments may be continuing to play a role in claims declines.
(0) The FOMC minutes from the February meeting didn’t feature any surprises (they tend not to), but appeared to be another hawkish signal, especially since ‘a few’ participants were noted as wanting a 0.50% hike instead of the final 0.25%. While old news now, the hawkishness may be even more meaningful with recent inflation coming in stronger than hoped on a variety of measures, including the Fed’s favorite PCE. In fact, their language remained ‘unacceptably high.’ In the meeting, there seemed to be a consensus of ‘ongoing’ rate increases still being the appropriate course, especially considering an easing in financial conditions outside of the Fed’s purview (higher stock prices, lower long-term rates, tighter credit spreads, weaker dollar, etc.). Keeping future inflation expectations anchored also remains a priority, if not discussed as much as backward-looking inflation numbers.
|Period ending 2/24/2023||1 Week %||YTD %|
|Bloomberg U.S. Aggregate||-0.89||0.16|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks fell back sharply last week, due to a variety of factors—but were focused on the economy and inflation most of all, per usual. By sector, energy earned a small gain followed by a flattish week for materials; the largest declines were in communications services and consumer discretionary. Real estate also fell back by nearly -4% along with higher interest rates.
On Monday, cautious forward-looking outlooks from Walmart and Home Depot were coupled with Russian President Putin’s speech declaring an exit from a major nuclear proliferation treaty, which led to the sharpest decline in several months. By Friday, a higher-than-expected PCE inflation reading and upward implications for interest rates further weighed negatively on market sentiment.
Investors continue to attempt to dissect and digest a complicated inflation vs. growth environment. It is not clear by any means that inflation has been beaten back, seen through stubbornly high CPI, PPI, and PCE readings, with services prices especially staying elevated (relative to goods prices, which have seen normalization, at least in the U.S.). Economic growth continues to roll along on the fringe of soft landing and recession, although positive numbers in recent weeks continue to point to the better possibility of the former. One positive is that slower GDP growth may help balance out the labor market without the more drastic outcome of a recession. In short, forward-looking conditions remain mirky. From the equity rally that began in October, stocks have given back about a third of the gains—not uncommon from a technical standpoint.
Another factor in recent sentiment for certain equity ‘growth’ sectors is the current U.S. Supreme Court case involving Google and Section 230 of the 1996 Communications Decency Act. This concerns the ability for internet firms to continue to fall under the umbrella of ‘platform’ (essentially an objective information portal, with no journalistic editorial role) or be re-classified under ‘publisher,’ which carries a different responsibility for moderating or at least reviewing content. In addition, being held as a publisher heightens exposures to litigation (and incentives to avoid it by limiting content to a greater degree), in line with the historical experience of newspaper publishers. The easiest liability avoidance technique would be simply exiting certain online segments, which could limit social media and online news availability.
Foreign stocks suffered negative returns last week as well, not helped by a stronger dollar, which detracted from U.S. investor returns. The U.K. and Japan fared slightly better than Europe and emerging markets, as better economic and earnings news was still offset by still-high inflation and rising chances of higher future yields. For perspective’s sake, inflation last month in the eurozone came in at 8.6% and 5.3% for headline and core, respectively—headline fell back a bit from the prior month, but levels remain problematic. In the emerging world, onshore Chinese stocks gained, but offshore fell back by several percent along with a continued ramp-up in rhetoric with the U.S.
Bonds fell back sharply last week as interest rates again climbed higher, along with inflation assumptions rising. The 10-year treasury note rose back toward the 4.0% for the first time in several months, after falling as low as 3.4% as recently as early February. Senior floating rate loans and high yield fared slightly better than longer duration treasuries and corporates, although the latter saw little difference in return. Foreign developed market bonds suffered from a sharp rise (+1.5%) in the value of the U.S. dollar, which has experienced a bit of a February countertrend rally. The pullback in fixed income over the past month has no doubt been directly related to the rise in longer-term treasury yields—themselves pulled higher by the persistent inflation readings. As markets often do, it appears the exuberance about ‘disinflation’ caused an overshoot to the lower side for long-term yields. With recession risks appearing lower (for now), chances of the Fed easing later this year have lessened, making a lower rate assumption less appropriate.
Commodities were mixed to down on net last week, with declines of -2% to -3% in agriculture and metals offset by a reversal spike in natural gas of nearly 10%, due to colder U.S. weather and a larger inventory drawdown. Crude oil was little changed last week, ending at over $76/barrel. Oil prices remain relatively depressed compared to expectations, with U.S. demand lower than last year at this time, and supplies fairly healthy (with help via releases from the U.S. Strategic Petroleum Reserve).
“The economy continues to show strength, and interest rates are repricing to account for the stronger than expected growth, tight labor market and the threat of sticky inflation,” said Sam Khater, Freddie Mac’s Chief Economist. “Our research shows that rate dispersion increases as mortgage rates trend up. This means homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among lenders to find a better rate.”
The 30-year fixed-rate mortgage averaged 6.50% as of February 23, 2023, up from last week when it averaged 6.32%. A year ago at this time, the 30-year FRM averaged 3.89%.
The 15-year fixed-rate mortgage averaged 5.76%, up from last week when it averaged 5.51%. A year ago at this time, the 15-year FRM averaged 3.14%.
Freddie Mac’s Primary Mortgage Market Survey® is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Mortgage Services Inc. dba Prestige Home Mortgage (NMLS#14216) in Vancouver, Washington we originate residential and reverse mortgages.
|Symbol||Name||Price||24h %||7d %||Market Cap||Volume(24h)|
Information current as of 5:40 AM PST, Monday, February 27, 2023. Source: https://coinmarketcap.com/
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.