Week in Review: August 4, 2023

August 7, 2023

Recap & Commentary

Markets ended the week lower following a downgrade of the United States’ credit rating by Fitch. Higher long-term yields stemming from the downgrade and news the Treasury is planning to sell $103B in new debt this week, placed further pressure on US equities. For the week, the 10-, and 30-Year Treasuries rose 0.08% and 0.19%, respectively, to settle at 4.03% and 4.20%. However, that masked intra-week moves that saw yields on the two bond briefly rise as high as 4.20% and 4.32%, their highest levels since last November.

On Tuesday, Fitch downgraded the US’s credit rating from AAA to AA+.  While the timing of the announcement came as a surprise, the rationale did not. The report cited a number of factors including expected fiscal deterioration over the next three years, a high and growing general government debt burden, and repeated debt-limit standoffs and last-minute resolutions over the past 20 years that have eroded confidence in fiscal management.

Reflecting the growing optimism surrounding the Fed’s ability to orchestrate a soft landing, both Bank of America and JP Morgan ditched their prior forecasts calling for a recession in 2023. The reversals came a week after Fed Chair Jay Powell stated that the Fed’s staff economists now expect a noticeable slowdown in growth, but not a recession, starting later this year.

Through Friday, 83% of S&P 500 companies had reported 2Q23 earnings. Thus far 79% of those companies have beaten their earnings estimates while 65% have beaten their revenue estimates. According to industry group FactSet, consolidated 2Q23 S&P 500 earnings are expected to decline 5.2%.

Economic Commentary

Nonfarm payrolls added 187k jobs in July, less than the expected 200k. Unemployment edged down 0.1% to 3.5% vs. expectations for no change. Total hours worked fell by 0.1 hours since June.  Job openings in June fell to 9.58M, the lowest level in over two years. Expectations had been for 9.61M job openings for the month. New hires, layoffs, and quits all came in lower from May.  Despite recent declines, openings remain far higher relative to pre-pandemic levels. Many aspects of the jobs data out last week indicate softening in the labor market and seem to support a Fed pause at the September meeting.  However, average hourly earnings is likely to concern committee members.  Average hourly wage growth of 0.4% for the month of July and 4.4% from a year ago will likely strike at least some Fed officials as remaining too strong. The market continues to expect no change in rates at the September meeting, pricing in a probability of 86%.

Manufacturing activity in July came in slightly lower than expected at 46.4, marking the 9th consecutive month in contraction territory. Only two out of 18 industries reported growth during the month. Services activity in July also came in lower than expected but continued to expand, registering 52.7.  Fourteen out of 18 industries reported growth during the month. The prices paid index increased by 5% in services and by 2% in manufacturing.

Of Note

The six largest banks will collectively pay nearly $9B of the $15.8B that the failure of Silicon Valley Bank and Signature Bank cost the FDIC insurance program.  Banks with more than $50B in assets will cover 95% of the total cost.

Market Indices   (As of 08/04/2023)

• Consumer Inflation
• Producer Inflation
• Consumer Sentiment
• Consumer Credit