Economic Update 3-13-2023
- Economic data for the week was largely focused on labor markets, with nonfarm payrolls and ADP employment coming in stronger than expected, while job openings declined and the unemployment rate increased. This pointed to a mixed overall message.
- Stocks fell back in both the U.S. and foreign markets due to tough central bank talk that pointed to higher interest rates, as well as volatility in financials late in the week due to a large regional bank failure. Bonds benefited from flows away from risk. Commodities declined due to lower perceived demand as recession risks remained high, in addition to warmer weather.
U.S. stocks suffered a variety of negative days last week, as interest rate expectations repriced higher due to Fed comments, and related concerns over certain bank balance sheets dominated sentiment by the week’s end (as discussed in an earlier note). Every sector ended in the negative, led by financials down over -8%. Defensive stocks such as consumer staples and utilities performed marginally better, with declines of ‘only’ -2% to -3%.
An initial catalyst was Fed Chair Powell delivering semi-annual testimony before the House Financial Services Committee, sharing that interest rates will likely end up ‘higher than previously anticipated.’ This naturally disappointed both stock and bond markets, as discount rates rose along with the assumed higher terminal value for the Fed funds rate, at least until the SVB issue discussed earlier, which reversed this sentiment.
Foreign stocks fared about as well as U.S. equities, with Japan experiencing outperforming with minimal losses. Concerns over higher interest rates and effects on the global banking system carried to Europe as well. In emerging markets, Chinese stocks fell back in keeping with other regions, with a below-expectations 5% GDP growth forecast, as well with the communist party meeting resulted in more defensive rhetoric towards the U.S., threatening relations.
Bonds gained last week as the risk-off sentiment from equities resulted in strong flows into intermediate- and long-term treasuries, and to some degree into investment-grade corporates. Unsurprisingly, high yield bonds underperformed in keeping with their correlation to equities. Foreign developed market debt also gained for similar reasons, with emerging markets mixed.
Commodities were down across the board last week by a few percent in most groups, aside from a small gain in precious metals. Crude oil was down nearly -4% on the week to under $77/barrel, due to assumed continued Fed rate hikes, which have traditionally weighed on economic activity and petroleum demand. Volatile natural gas prices fell over -15% on the week as early March weather has turned milder, reducing heating needs.
|Period ending 3/10/2023||1 Week %||YTD %|
|Bloomberg U.S. Aggregate||1.17||1.45|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.