Week in Review: August 25, 2023

August 28, 2023

Recap & Commentary

Markets ended the week mixed as they continued to struggle under the weight of higher interest rates and ongoing concerns about future monetary policy actions. Treasury yields remained elevated, reflecting growing expectations that the Fed is not done with its current rate hike cycle. While expectations for a 0.25% rate increase at the Fed’s September meeting have consistently hovered around 20% over the past month, expectations for a 0.25% hike at the Fed’s November meeting have increased from 30% to 47%.

Speaking at the Fed’s annual banking symposium held in Jackson, WY, Fed Chair Jay Powell largely reiterated prior comments stating, “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” Speaking separately at the event, Cleveland Fed President Loretta Mester suggested that the Fed will likely need to raise rates again at some point, stating “We probably have some more work to do” to return inflation to the Fed’s longer-term 2% target.

The recent rise in rates is a function of shifting market expectations regarding Fed monetary policy, but also a reflection of the growing optimism of a soft landing which fueled equity markets in July. As recession expectations are dialed back, yields are seeing a corresponding increase reflecting greater future growth expectations.

Economic Commentary

Existing home sales declined 2.2% in July to an annualized rate of 4.07M.  Expectations had been for 4.15M. Compared to a year ago, sales were down 17%. Inventory remained tight as homeowners’ reluctance to give up locked in mortgage rates continued. With the average 30-year mortgage rate at 7.23%, the highest level since 2001, low existing home supply should persist. Too fill the supply void, buyers continued to turn to new homes in July as evidenced by the 4.4% sales increase. At an annualized pace of 714K, new home sales reached their highest level in 17 months. Compared to a year ago, sales jumped 31.5%.

Manufacturing and services activity both saw mid-month declines in August weighed down by contracting new orders. The services business activity index fell to 51, a 6-month low, while the manufacturing output index fell to 47.5.  Cost pressures were on the rise with fuel, wage, and raw material prices all increasing but lower demand during the month kept a lid on selling prices as firms sought to stay competitive and increase sales.

Data on durable goods orders was mixed in July. The headline reading showed orders falling by 5.2% for the month against expectations for a decline of 4%.  When removing transportation, a volatile category, core durable goods orders increased 0.5% during the month against an expected increase of 0.2%.

Consumer sentiment was down slightly to 69.5 in August. The report illustrated a consumer more tentative around economic outlook than in months prior.

Of Note

Reflecting recent upbeat economic data, the Atlanta Fed’s GDPNow forecasting tool is currently projecting 3Q23 GDP growth of 5.9%, over twice the 2.4% pace recorded in 2Q23 and the highest since the 7% growth recorded in 4Q21.

Market Indices   (As of 08/25/2023)

• Aug. Employment Report
• Core PCE Inflation
• JOLTs
• ISM Manufacturing
• Pending Home Sales
• Personal Income & Spending
• Consumer Confidence