Week in Review: August 18, 2023

August 21, 2023

Recap & Commentary

Markets ended the week lower, with the S&P 500 notching its third consecutive weekly decline, the longest such stretch since February. For much of the summer, markets were propelled higher by increasing optimism that the Fed might be able to orchestrate an elusive soft landing. Over the past several weeks, higher interest rates caused by a variety of factors including Fitch’s downgrade of the United States’ long-term credit rating, higher Treasury issuance, upbeat economic data, and concern that the Fed might raise rates at least once more this rate hike cycle, have weighed on equities.

The release of the Fed’s July FOMC meeting minutes reinforced some of those concerns, noting that “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”  While markets are not currently pricing in any additional rate hikes, they have consistently underestimated the Fed’s willingness to do so as its fight to return inflation to 2%.

This week, the Fed and other global central bankers will convene in Jackson Hole, WY for the Fed’s annual economic policy symposium. This year’s topic will be “Structural Shifts in the Global Economy.” While economists may find the topic to be of interest, investors will be more focused on any comments by Fed Chair Jay Powell relating to current Fed policy. Typically, Powell and other Fed officials don’t reveal much about future policy actions at this meeting. However, last year Powell caught markets by surprise with unusually frank comments in which he said the Fed must act “forcefully” to curb inflation and that doing so would create “some pain” for both households and businesses. With headline inflation having decelerated rapidly since June 2022, should Powell choose to comment on future Fed actions, he is more likely to repeat his well-worn lines about the potential for rates to stay higher for longer.

Economic Commentary

Economic data last week came in generally stronger than expected. Despite the Fed’s desire to cool the economy, retail sales jumped 0.7% in July, well above the 0.4% consensus forecast. Core sales, which exclude automobiles, building materials, and gas stations and is important for GDP forecasting rose 1.1% in July. Compared to a year ago, retail sales rose 3.2%.

Housing starts came in stronger than anticipated in July rising by 3.6% to 1.452M vs. expectations for 1.448M starts. The increase was driven by single-family homes with three out of four regions contributing.

Industrial production rose 1.0% in July. The reading was well ahead of forecasts for an increase of 0.3%. Much of the gain was attributable to utilities which increased 5.4% as above average temperatures for the month increased demand for cooling. Notably, manufacturing output increased by 0.5% after several consecutive months of declines.

Of Note

The average 30-year mortgage rate rose to 7.09% over the course of the week, its highest level since 2002. At the start of 2022 the rate stood at 3.1%. For a $500K mortgage, the increase adds an additional ~$1,200 to the monthly payment, or ~$439K over the life of the loan.

Market Indices   (As of 08/018/2023)

• Existing Home Sales
• New Home Sales
• Manufacturing & Services PMI
• Durable Goods Orders
• Consumer Sentiment
• Weekly Jobless Claims