Economic and Market Overview
August 2023
Concerns over U.S. fiscal and monetary policy combined with signs of economic weakness abroad to spark selloffs in both equity and fixed income markets.
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The S&P 500 returned -1.6%, its first monthly decline since February, and most major equity indices fared even worse. The Treasury yield curve bear steepened significantly in August, with 30-year yields rising by 20 bps and 2-year yields little changed. The selloff began early in the month when the Treasury Department outlined larger-than-expected issuance plans and investors considered the possibility of a reduction in foreign demand for Treasuries after the BOJ took another step away from their yield curve control policy. Longer-term yields had increased by even more through mid-month, but retraced partially as investors became increasingly concerned about downside growth risks in China and Europe. Credit spreads widened over the first half of the month, but tightened over the second, in a rally led by the long end. Given a similar path by long Treasury yields, the YTW on the Bloomberg Long Credit Index closed within 5 bps of 6.00% on the 21st, but was 30 bps lower by month-end. Although the primary market traditionally slows down near the end of the summer, it was particularly light this year. J.P. Morgan reported just $69 billion in total IG issuance, well shy of the $102 billion average for the trailing four Augusts. WTI managed to overcome an early selloff to post a modest gain, while the dollar strengthened.
Economic Data
Data releases over the month were mixed, with signs of a cooling labor market, but evidence that consumer spending remains strong. Nonfarm payrolls rose at a 187,000 pace in August, which was 17,000 over forecasts, but the release included a downward revision of a net 110,000 jobs to the prior two months. Also, the unemployment rate rose 0.3%, to 3.8%, but was driven in part by a higher participation rate. Consumers’ wallets remained open, however, at least through July as both retail sales and personal spending data topped forecasts. That could change, though as both major consumer sentiment indices declined, including a nearly 10-point drop (to 106.1) in the Conference Board’s that was led by sharp drops in the expectations and present situation components. In the manufacturing sector, hard data and sentiment surveys continued to paint a murky picture. Housing data for July, on the other hand, were generally stronger than expected, with existing home sales the only notable laggard. U.S. real GDP grew at a 2.1% annualized rate in Q2 according to the second release, 0.3% below the advance figure. The downward revision was driven by inventory and net trade, however, as personal consumption was revised 0.1% higher, to 1.7%. Q3 GDP growth is expected to accelerate to around a 3.0% annualized pace.
Inflation
Inflation data throughout the month were broadly in line with expectations. Headline and core CPI each rose at 0.2%, as each landed right on consensus forecasts. Looking beyond the headline changes, core goods prices declined while core services increased. PPI releases were over expectations, though June’s results were revised lower. Later in the month, Core PCE came in at 0.2% MoM and 4.2% YoY, both as expected. Despite the absence of hotter-than-feared data releases, inflation remains well above the Fed’s longer-term 2% target for Core PCE, though market pricing reflects confidence in the central bank’s resolve as breakeven levels declined across the curve. The 10y breakeven fell 13 bps, to 2.24%, while the 5y/5y rate dropped 16 bps, closing at 2.28%.
Monetary Policy
The FOMC took their traditional August recess and decamped to Jackson Hole, where the conversation focused on the confluence of surprising resilience of economic activity and remarkable disinflation. Chairman Powell’s keynote address largely repeated the message from the July FOMC events. The Fed welcomes the seemingly costless disinflation that has occurred in recent months, but cautions against declaring victory prematurely. Monetary policy expectations were little changed in the month and continued to embrace the Fed’s higher-for-longer policy path, consistent with our own outlook. Interest rate markets are pricing a roughly 50% chance of another rate hike and the first rate cut in the summer of 2024. It should be noted, however, that market participants have expressed a higher probability of a recession than FOMC participants, which partly explains the downward trajectory in the projected rate path starting next year.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data is as of the dates noted.
