S&P 500: 1.31% DOW: 0.65% NASDAQ: 2.37% 10-YR Yield: 4.63%
What Happened?
In a relatively quiet week on the economic data front, financial markets managed to generate volatility as they absorbed the impact of last week's data influx, lackluster performance in a treasury auction, and extensive commentary from Federal Reserve speakers, including Chair Powell.
During the early part of the week, stocks traded within a narrow range, with neither bullish nor bearish forces dominating in anticipation of Jerome Powell's remarks to the International Monetary Fund. However, Thursday witnessed a sharp downturn in both equity and bond indexes, triggered by Powell and others adopting a more hawkish tone, suggesting the possibility of additional rate hikes if deemed necessary. These comments followed the substantial easing in interest rates observed after the FOMC held rates steady in the previous week. The market reaction intensified with the disappointing performance of the 30-year treasury auction, reflecting a sharp decline in demand for government bonds and renewing upward pressure on yields. Despite this abrupt sell-off, optimism swiftly returned leading to a robust Friday session as equities recouped all their losses and then some, concluding a second consecutive week of gains.
Beneath the surface, performance diverged substantially despite robust gains at the index level, with 6 sectors posting increases and 5 sectors experiencing declines. Technology stocks (+4.5%) took the lead and their substantial weight in the S&P propelled the overall market upward. Additional gainers included Communications (+1.4%) and Industrials (+0.9%). On the flip side, Energy (-3.7%) recorded the most substantial decline as oil prices remained under pressure, while Utilities (-2.5%) trailed due to elevated rates.
U.S. Federal Reserve officials including Fed Chair Jerome Powell said they are still unsure that interest rates are high enough to finish the battle with inflation
Powell was clear that "if it becomes appropriate to tighten policy further, we will not hesitate to do so."
Powell cautioned that the Fed may get little further help in taming price increases from improvements in the supply of goods, services and labor
The key takeaway - Jerome Powell and other Federal Reserve officials had the opportunity to address investors following last week's decision to maintain steady interest rates, a move that initiated a decline in bond yields on expectations of a more accommodative policy. Although their comments didn't differ significantly from those made during the policy meeting, they did adopt a more hawkish tone. In their remarks, particularly emphasized by Powell, the members pushed back against the notion that the conclusion of the current hiking cycle is set in stone, as reflected in market pricing following the policy meeting. The Fed aims to strike a delicate balance between the risks of both over and under-tightening while also managing market expectations. Should investors anticipate a dovish policy shift, they are likely to drive down interest rates, easing financial conditions and offering less support to central bankers in their efforts to curb inflation.
The number of Americans who applied for unemployment benefits last week fell slightly to 217,000 and remained at very low levels
Economists had forecast 220,000 claims
New jobless claims rose in 34 of the 53 states and territories that report
The number of people collecting unemployment benefits in the U.S., meanwhile, rose for the seventh week in a row to 1.83 million
The key takeaway - While there are subtle indicators hinting at a potential softening in labor market strength, overall metrics, such as the weekly jobless claim numbers, still portray a robust job market. The average jobless claims remain significantly below a threshold that would raise concerns about deterioration; historically, recessionary environments tend to exhibit claims exceeding 300,000. Looking at the details of both this data and the previous week's jobs report reveals a few signals suggesting that the labor market may transition from its current boil to a simmer. The uptick in continuing claims implies that unemployed Americans are having a more difficult time finding jobs. Additionally, from last week's report, there are indications that wage gains are beginning to moderate. Investors are hoping for a shift towards a sustainable, less inflationary labor market as the economy grapples with the full impact of the Federal Reserve's hiking cycle.
Banks tightened lending standards for U.S. businesses and households in the third quarter, but the pace of change appeared to ease
While more than half of banks reported tightening business lending standards in the second quarter, just 35% said they cranked down further in the third quarter
Demand for loans fell broadly, with 60% of banks citing moderately or substantially weaker demand for home mortgages in the third quarter
The key takeaway - The Federal Loan Officer Survey, conducted quarterly, offers a unique perspective on the economic landscape by examining how banks are lending and the demand for such funding. The latest report indicates a widespread tightening of lending standards for both households and businesses, with banks imposing more stringent credit requirements. Since the banking stress experienced in March, there has been a decrease in risk tolerance among bankers, along with concerns about liquidity for loans. These factors continue to contribute to the tightening of lending standards. Conversely, consumers and businesses have curtailed their demand for credit due to the rising interest rates, which in turn increases borrowing costs. This evolving dynamic often serves as a precursor to an economic slowdown. The reduction in lending within the financial system tends to dampen both spending and investment, signaling a potential contraction in economic activity.
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