Week in Review: September 8, 2023

September 9, 2023

Recap & Commentary

Markets ended the week lower, pressured by stronger than expected services data and ongoing tensions with China. Separately, oil prices climbed to their highest levels since last November after Saudi Arabia and Russia announced they would extend their 1.3 million barrels per day production cut announced in July, through the end of the year.

Reflecting the recent increase in optimism surrounding the likelihood of the Fed orchestrating a “soft landing”, Goldman Sachs reduced its odds of a US recession occurring in the next year from 35% to 15%.

Bette-than-expected ISM services data added to the narrative of improving economic activity. However, it also exacerbated ongoing concerns about the possibility of additional Fed rate hikes. Currently, the market expects the Fed to maintain interest rates at their current levels at their September meeting but sees the odds of another 0.25% rate increase in November at nearly 50%.

Increasing tensions between China and the US weighed on the tech sector in general and Apple in particular after a report by the Wall Street Journal indicated that China has banned government officials from using Apple iPhones for work purposes. In 2022, Greater China (including Hong Kong and Taiwan) accounted for $74B of iPhone sales and about 90% of all Apple products are produced in China. The crackdown on iPhones, which has not been officially announced, appears to be the latest salvo in an increasingly acrimonious relationship between the US and China.

Economic Commentary

Services PMI rose to 54.5 in August. This was the highest reading since February and well ahead of the consensus forecast of 52.5. The report showed strong new orders but also indicated that businesses paid higher prices for inputs during the month.  The prices paid component increased to 59 in August.  Prices paid had gotten as low as 54 in June.  Demand for labor remained strong with the employment index increasing to the highest level since December 2021.

New orders for factory goods fell by 2.1% in July after increasing 2.3% in June.  Expectations had been for a larger decline of 2.5%.  The volatile transportation category drove much of the decline.  Factory orders excluding transportation increased by 0.8% since June.

The trade deficit was $65B in July, smaller than the $68b forecast. Exports rose 1.6%, the first gain in four months, while imports rose by 1.7%. Since last year, imports and exports have fallen by 4.7% and 3.4%, respectively.  Exports have been depressed by weak demand from Europe amid the war in Ukraine.   Weakened demand for goods as US consumer spending continues to shift back towards services has contributed to declining imports.

Weekly jobless claims came in better than anticipated at 216K against expectations for 234K claims.  This was the lowest number of weekly claims since January.

Of Note

According to Bloomberg, for the 12-month period ending July 31, Chinese goods accounted for 14.6% of all goods imported into the US, the lowest level since 2006. By comparison, Chinese goods as a percent of total US imports peaked at 21.8% in March 2018.

Market Indices   (As of 09/08/2023)

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