Week in Review: September 22, 2023

September 22, 2023

Recap & Commentary

Markets ended the week lower with the S&P 500 posting its largest weekly decline since March. A rise in rates across the Treasury curve following the Fed’s FOMC meeting was the primary culprit.

As expected, the Fed left rates unchanged but indicated at least one additional rate hike remains possible before year end. In addition, the Fed continued to reinforce their message of higher rates for longer through both their updated economic projections as well as comments. Reflecting the ongoing strength in the economy, the Fed’s post-meeting announcement described the pace of economic activity as “solid,” whereas in July it described it as “moderate.”

In its updated economic forecasts, the Fed left its year-end rate projection of 5.6% unchanged, effectively implying one additional 0.25% rate hike. Policy makers also lowered their year-end unemployment rate from 4.1% to 3.8% and doubled their full-year GDP forecast from 1.0% to 2.1%. Perhaps most noteworthy was the increase in the 2024 Fed Fuds rate projection from 4.6% to 5.1%, implying just two rate cuts next year vs. the prior projection of four.

In his post-meeting news conference, Fed Chair Jay Powell noted the continued strength of the consumer, before stating that the “process of getting inflation sustainably down to 2 percent has a long way to go.”

The combination of the improved economic outlook and increased rate forecast for 2024 helped push interest rates to new multi-year highs. The 2-Year Treasury yield rate briefly hit 5.15%, its highest level since 2006, while the 10-Year Treasury yield briefly hit 4.5%, its highest highest since 2007.

Economic Commentary

Existing home sales fell 0.7% in August to a 4.0M annual rate, as higher mortgage rates continued to weight on activity. Compared to a year ago, sales were down 15%. Despite higher mortgage rates, limited supply has helped support prices, which saw the median price rise 4% from a year ago to $407K.

Building activity in the housing sector slowed significantly in August, as new home starts fell 11.3% to an annualized pace of 1.28M, far below the forecast off 1.44M, and the lowest absolute level since June 2020. By property type, both single and multi-unit starts declined during the month with multi-units declining 26%. Despite the large decline, multi-unit properties currently under construction are near record highs dating back to the 1970s. Somewhat helping to offset the disappointing starts data was a 6.9% jump in building permits.

US economic activity hovered around stall-speed in September as both the manufacturing and services sectors registered readings close to 50, the threshold between expansion and contraction. Manufacturing activity improved slightly to 48.9 but remained in contraction territory for an 8th consecutive month. Services activity slowed to 50.2, an eight-month low.

Weekly jobless claims fell to 201K, their lowest level since January. At the same time, continuing claims fell to an eighth-month low suggesting unemployed individuals are having an easier time finding work.

Of Note

Barring a last-minute solution, the federal government will shutdown after September 30, with Congress unbale to agree on a budget for fiscal year 2024. The shutdown would mark the first since 2019 and 5th since 2000.

Market Indices   (As of 09/22/2023)

• Core PCE
• New Home Sales
• Pending Home Sales
• Durable Goods Orders
• Personal Spending & Income
• Consumer Sentiment
• Weekly Jobless Claims