Week in Review: October 20, 2023

October 20, 2023

Recap & Commentary

Markets ended the week lower, as investors fretted about ongoing political gridlock in Washington, concerns that fighting between Israel and Hamas could lead to a wider regional conflict, and a further surge in longer-term interest rates. Continuing its recent ascent, the 10-Year Treasury yield gained 0.30% for the week to end at 4.93%, after briefly breaching 5.0% intraweek for the first time since 2007. Since the start of May when it stood at 3.42%, the 10-Year Treasury yield has increased 44%. While equity markets appeared relatively sanguine about rising rates during the early part of the summer, of late the higher rates have helped trim the S&P 500’s year-to-date- return from a peak of 19.5% at the end of July, to 10.0% as of Friday.

Speaking at a conference on Thursday, Fed Chair Jay Powell intimated that while a November rate hike might be off the table, current stronger-than-expected economic growth may ultimately warrant higher rates. “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” according to Powell.

Through Friday, 17% of S&P 500 companies had reported 3Q23 earnings. Thus far, 73% have beaten their consensus estimate, while 66% have beaten their consensus revenue estimate. According to industry group FactSet, consolidated S&P 500 earnings growth is expected to be -0.4%, which would extend the current earnings “recession” to four consecutive quarters.

Economic Commentary

Despite various headwinds facing the consumer- still elevated inflation, slowing wage growth, higher interest rates on debt- September retail sales bucked expectations, coming in higher than expected for the 3rd consecutive month with sales rising 0.7% against expectations for a 0.3% increase. The increase was broad based across multiple categories. Core retail sales, crucial for calculating the consumer spending component of GDP, rose 0.6% vs. expectations for a 0.1% increase. Core sales increased at a 7.1% annualized rate during the 3rd quarter.

Housing starts rose 7% in September to an annualized rate of 1.36M, slightly lower than forecasts of 1.37M.  The increase was driven by both single-family and multi-family starts. By geography, all regions contributed except the Northeast where housing starts fell during the month.

Existing home sales declined 2.0% in September to a 3.96M annual rate, beating the consensus expectation for 3.89M but falling to the lowest level since 2010.  Sales were down 15% since last year. Affordability remains a challenge for many buyers as mortgage rates recently hit their highest level since 2000, while limited supply has kept home prices elevated.

Industrial production increased 0.3% in September, beating the consensus expectation for a flat reading. Output in August was revised down to a flat reading from the previous estimate of a 0.4% gain. Manufacturing for automobiles and non-autos were strong in September, rising by 0.4% and 0.3%, respectively.  Output in the mining sector increased 0.4% for the month.

Of Note

On the heels of mortgage rates reaching their highest level since 2000, mortgage applications fell to their lowest level since 1995. According to Freddie Mac, the average 30-Year mortgage rate now stands at 7.6%.

Market Indices   (As of 10/20/2023)

• 3Q GDP
• Core PCE Inflation
• New Home Sales
• Pending Home Sales
• Consumer Sentiment
• Personal Income & Spending
• Durable Good Orders
• Manufacturing PMI
• Services PMI