Week in Review: June 9, 2023

June 12, 2023

Recap & Commentary

Markets edged slightly higher over the course of the week with the S&P 500 finishing at a new 2023 high. With the debt ceiling resolved, earnings season effectively over, limited economic news, and the Fed preparing to meet this upcoming week, markets effectively treaded water.

In late March, days after the failure of Silicon Valley Bank, market expectations plunged with investors suddenly pricing in four Fed rate cuts before year end.  However, with the regional banking crisis having largely dissipated, and fears of an imminent recession receding some, market expectations have recovered.  Currently, markets expect the Fed to forgo a rate hike in June, marking the first pause in the Fed’s current rate tightening cycle since it began in March 2022. However, markets expect one final 0.25% increase in July, before the Fed commences with rate cuts beginning with a 0.25% reduction in November.

For its part, the Fed has consistently stated that it intends to hold rates steady for some time after they reach a level the Fed believes is sufficiently restrictive to return inflation to the Fed’s longer-term target of 2%. Many Fed watchers interpret that to mean the Fed will not cut rates before 2024. Though markets have not yet fully accepted that notion, they have largely acquiesced. Full acceptance would likely serve as a headwind for both equity and fixed income markets relative to previous expectations of multiple cuts before year end.

Economic Commentary

The US services sector grew tepidly in May, coming in at 50.3, well below the consensus forecast of 52.2. While the reading indicates a fifth consecutive month of expansion in the sector, new orders declined by 3.2% since April and order backlogs plummeted 8.8% to the lowest level since 2009, indicative of weakening demand.  Employment in the services sector dipped into contraction territory after three consecutive months of growth.  This was driven by four of the largest service industries including real estate, information, finance, and healthcare reporting declines in employment. Prices paid by services organizations continued its downward trend, coming in 3.4% lower than last month’s reading of 59.6, but remain too elevated with 2/3 of industry respondents reporting higher prices paid in May.

Factory orders grew 0.4% in April. The consensus forecast had anticipated growth of 0.8% for the month.  The increase was largely driven by defense sector orders. Excluding the defense sector, factory orders in April would have declined by approximately 0.4%.

Consumer credit balances rose by $23B in April versus expectations for an increase of approximately $22B, showcasing the continued strength of the US consumer.  Revolving credit balances rose 13% in April while non-revolving credit saw an increase of 3%.

Weekly jobless claims rose sharply by 28,000 to 261,000, the highest level since October 2021. Economists had forecast 235,000 claims for last week.

Of Note

Allstate announced that it will no longer accept new applications for homeowners insurance in California citing the increased frequency of natural disasters including wildfire and floods as well as higher construction costs.

Market Indices   (As of 06/09)

• Consumer Inflation (CPI)
• Producer Inflation (PPI)
• Retail Sales
• Industrial Production
• Consumer Sentiment
• Weekly Jobless Claims