Week in Review: August 11, 2023

August 14, 2023

Recap & Commentary

Markets spent most of the week struggling to find direction, before ending lower. That is not to say that investors had nothing to consider, as ratings agency Moody’s downgraded a number banks at the start of the week, China reported outright deflation for the month of July, and US inflation provided mixed signals on where prices might be headed next.

On the heels of Fitch downgrading the US credit rating the prior week, Moody’s downgraded 10 small- to mid-sized banks, changed its outlook for 11 others to negative, and warned that it might cut its ratings for some larger banks in the future. In its report, Moody’s noted that many of the strains on the banking system revealed by the collapse of Silicon Valley Bank and First Republic Bank earlier this year remain. The report also stated that with the expectation of a mild recession in early 2024 “there will likely be a tightening of credit conditions and rising loan losses for U.S. banks.”

In another sign of China’s faltering post-pandemic recovery, headline consumer prices dropped 0.3% from a year ago, the first outright decline since February 2021. The decline was largely attributable to lower food, energy, and commodity prices, reflecting weaker domestic demand. In addition, trade data suggests weaker foreign demand for Chinese goods. In July, total exports fell 14.5% from a year ago. Trade with the US has also experienced a significant decline with exports during the first half of 2023 falling 25% from a year ago.

Economic Commentary

Headline consumer inflation (CPI) rose 0.2% in July, in line with consensus expectations. Food and energy prices increased by 0.2% and 0.1% respectively, during the month. Compared to a year ago, inflation rose 3.2%. Core CPI, which excludes food and energy prices, increased 0.2% in July and 4.7% since last year. Shelter accounted for most of the increase, with owner’s equivalent rent rising 0.5% during the month. The consensus belief based on real time housing indicators is that price pressures in housing should soften in the coming months. Recent upward pressure on oil and grain prices bare watching in future readings. On the producer side, both core and headline PPI increased by 0.3% during the month. The reading continued to illustrate the differences in inflationary pressure between a goods sector in contraction and a services sector where prices continue to remain too elevated. For the month, goods prices slightly increased by 0.1%, while service prices rose 0.5%.

Consumer sentiment in the early part of August remained largely unchanged from July, and inline with expectations. At a reading of 71, sentiment is well above its all-time low of 50, set in June 2022, but still trails its historical average of 86. Year-ahead inflation expectations were relatively unchanged since last month, decreasing 0.1% to 3.3%. Separately, weekly jobless claims increased 21K to 248K.  Expectations had been for an increase of 3K to 230K.

Of Note

According to the Federal Reserve Bank of New York, consumer credit card debt now exceeds $1T for first time ever. Though delinquencies remain below historical levels, there is concern that they could increase with the resumption of student loan payments this fall. The new record level of debt comes at a time when the average credit card interest rate is more than 20%, also a record.

Market Indices   (As of 08/011/2023)

• Housing Starts
• Retail Sales
• Industrial Production
• Weekly Jobless Claims