Overview: U.S. stocks finished the week higher last week for the first time in five weeks, with the S&P 500 index up by 0.5% on the week. A strong employment report on Friday initially sent stocks lower, but markets recovered as investors were encouraged by wage inflation data in the report. Specifically, average hourly earnings fell to 4.3%, down from 4.3% the prior month. Moderating wage growth, along with expectations that overall inflation will continue to decline, has investors encouraged that the Federal Reserve won’t have to hike rates at the upcoming FOMC meeting next month. Key inflation data will be reported on Thursday this week, with headline and core consumer prices (CPI) expected to decline from 4.3% in August to 4.1% in September. Interest rates have trended higher over the past few weeks, with expectations that the Fed will keep rates higher-for-longer to bring inflation down toward the 2% long-term target.
In the bonds markets, the 10-year Treasury note finished the week at a yield of 4.78%, a full 70 basis points (0.70%) higher from the end of August. Sharply higher yields have translated to negative total returns for bonds, with the broad-based indices for both taxable and municipal bonds both down about 2% for the year-to-date. Looking ahead, eyes will be on the possibility of a government shutdown and the developments in the deadly Israel-Hamas conflict that broke out over the weekend. On the political front, the U.S. government narrowly averted a shutdown just hours before the Oct. 1 deadline, with Congress passing a funding bill that will keep the government open through Nov. 17. However, the removal of Kevin McCarthy as house speaker increases political instability and makes the risk of a shutdown more likely. Meanwhile, increased geopolitical tensions could have ramifications for the energy market, where crude oil futures were trading 4% higher Monday morning.
Update on Inventory Levels (from JP Morgan): Inventory levels are a key driver of economic momentum as businesses decide to cut or add to stock piles to keep them at an optimal level, but what is an optimal level? The monthly ISM reports ask service providers and manufacturers how they feel about current inventory levels. Manufacturers are asked if their customers’ inventories are “too low,” “too high” or “just right,” while service providers are asked the same question about their own inventories. The past few readings, including the one for September, have been close to the long-run average of 52.5. Unsurprisingly, manufacturers typically report their customers’ inventories are “too low” because they want to believe their customers are going to buy more. On the other hand, service providers often see their inventories as “too high” because they want to turn over more inventory. Interestingly, the services report showed that 82.1% of service providers now see inventories as “just right,” the highest level in the report’s history. While the monthly figures are volatile, especially for manufacturing, the sum of this data suggests inventory levels might be near equilibrium. Balanced inventory levels can prevent large swings in production, potentially leading to more stable GDP growth. 3Q23 could be the high watermark for GDP growth in the near term with consensus expectations hovering near 3.0% SAAR. However, given the uncertainty of future growth, investors should continue to navigate cautiously and not take all risk off the table in case the economy remains resilient for longer. Maintaining appropriate exposure to equities and fixed income, which both tend to outperform cash after peak rates, is key.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg
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