Financial Market Update – Week of 08/07/2023

Presented by Marc Aarons

Hope you are doing well! U.S. equities traded lower last week on the heels of a U.S. debt downgrade. However, a potentially “goldilocks-like” jobs report came into focus on Friday, so short-term market sentiment is on the mixed side.

By last Friday’s close, here was the weekly tale of the tape: the S&P 500 retreated by 2.27%, the Nasdaq 100 shed 3.02%, and the Dow Jones Industrial Average fared the best, decreasing by 1.11%.

Fitch Agency U.S. Debt Downgrade

The financial world was abuzz last week surrounding the credit rating agency, Fitch Ratings, downgrading the U.S. credit rating from AAA to AA+.

Fitch Ratings is one of the big three credit rating agencies, alongside S&P Global Ratings (formerly Standard & Poor’s) and Moody’s. The agency cited “erosion of governance” and “expected fiscal deterioration over the next three years” as reasons for the downgrade.

Fitch had placed the U.S. on a negative watch in May, citing the debt ceiling standoff. We will be monitoring the market’s continued reaction to the downgrade this week.

Jobs Report – Goldilocks?

Jobs data for July implied somewhat of a “Goldilocks” scenario, with nonfarm payroll data showing 187,000 jobs created in July added versus the Dow Jones estimate of 200,000. So, why is it a potentially Goldilocks-like number?

It’s important to remember that Goldilocks preferred her porridge to be just right–not too hot, not too cold.

At first glance, it may seem that the jobs number is too cold. However, a jobs addition of 187,000 is still quite solid and bolsters the probability that the Fed could be less aggressive going forward, as it serves as partial evidence that the economy has cooled.

Many economists would like to see jobs growth at a “just right” level, indicating growth, but not so much that the Fed will be too aggressive. This increases hopes for a “soft landing.”

In addition, the U.S. unemployment rate dropped to 3.5% versus expectations of holding steady at 3.6%. Adding to the data-dependent Fed outlook will be this week’s CPI data.

Inflation Data on Tap

With the July jobs report out of the way, attention this week will turn to CPI data on Wednesday morning.

The continuously all-eyes-glued inflation metric is expected to show a year-over-year increase of 3.3% for July, after last month’s data showed an increase of 3.0% versus 3.1% estimates.

The year-over-year Consumer Price Index monthly data has come in below estimates for the last four consecutive months. Will it do so again, or is inflation still sticky and potentially troublesome? We will find out this week.

Treasury Yields Rise

As we observed in the week before last, Treasury yields rose, even in the wake of the recent bullishness throughout U.S. equities. They rose with good reason–ahead of the U.S. debt downgrade.

10-year note yields reached highs near 4.20% last week on the heels of the Fitch downgrade and closed out the week near 4.061%. The 10-year yield has not traded at 4.20% since October/November of 2022 when the Fed was in full-on hike mode, and before that, 2008.

It does give us food for thought. While the consensus has been that inflation has settled down and interest rates will decline at some point in the future on an easing Fed, the 10-year yield could be telling a different story. Let’s see how the CPI data affects bond yields this week.

Putting It Together

The U.S. debt downgrade had a rather profound impact on the markets last week, but the decline thus far on the news has been orderly. Industrials fared the best among the three major stock indexes, and the potentially goldilocks-like jobs number smoothed some short-term nerves on Friday.

Last week’s shift in short-term market sentiment seemed to be overdue, with the credit downgrade being the catalyst, as some equity valuations may have been stretched. In addition, overall market sentiment had been rather wildly bullish for an extended period. This week, attention will turn to CPI and if the decelerating inflation pattern continues.

If recent market developments have prompted questions or have you considering a strategy shift, please let me know, and we can connect to discuss. As always, I am here as a resource for you.

Marc Aarons may be reached at (714) 887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

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