Tag: unemployment

Weekly Recap:

Much like the rest of the month, the last week of November (and the first day of December) featured rapidly falling bond yields, which in turn drove stocks higher via P/E multiple expansion. By week’s end, 10-year Treasury yields had fallen nearly 80 basis points from their recent cycle high on October 19th. During that time, the bond market narrative has shifted dramatically. In mid-October, investors fretted that the deluge of supply coming from the US Treasury would overwhelm a shrinking buyer base, pushing yields even higher. Since then, fixed income investors have embraced the disinflationary trend, and have been encouraged by public statements from FOMC members that appear to suggest that the hiking cycle is over (despite occasional comments from Jerome Powell that are clearly intended to leave the door open just a crack).

As discount rates have fallen, P/E multiples have expanded, pushing stock prices sharply higher. Cyclicals (ex energy) were the biggest beneficiary last week, perhaps owing some of their strength to an upwardly revised Q3 GDP print (to 5.2% q/q annualized) that may have increased some investors’ confidence that a soft landing had already been achieved (note that Albion does not share this view). See the Chart of the Week for annualized GDP growth in recent quarter along with consensus estimate through the end of 2024.

October PCE data released last week reinforced the disinflationary trend, with headline PCE flat sequentially while core (ex food & energy) PCE was just 0.2% m/m. On an annualized basis, the last six months worth of Core PCE data point to a real time inflation rate of just 2.5%. The past three months of core PCE are even more sanguine at just 2.35% annualized.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 19x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets imply very low odds of another 25bp rate hike, and that the Fed will begin cutting rates in mid-2024.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged

Weekly Recap:

Equities rose and bonds were mixed during a relatively quiet, holiday-shortened week. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all rose for the 4th consecutive week, and all finished less than 1% below their respective YTD highs set in late July. Small caps and international stocks were also better last week, but continue to lag US large caps on a YTD basis.

Bonds were mixed, with Treasury yields inching higher after the November FOMC meeting minutes reminded investors that the Fed does not consider the inflation fight to be over. Coming into the week, futures markets were pricing a 0% chance of another 25bp rate hike occurring by early next year, but by the end of the week that had risen to an implied probability of around 13% (roughly a 1-in-8 chance). 2y yields were pushed higher by 6bp as the yield curve inversion deepened slightly.

Meanwhile, credit markets continue to be buoyant, to the benefit of corporate bond prices which have rallied sharply in recent weeks. Index average investment grade credit spreads finished the week at 102bp, the tightest level since early 2022 (see the Chart of the Week for a time series). It is fair to say that credit markets are not pricing in any meaningful probability of a recession in the near term.

Incoming macro data paints a less rosy picture than credit and equity markets. Last week alone, the Conference Board’s Leading Economic Index (LEI) fell for the 19th month in a row, existing home sales fell sequentially for the 5th straight month, durable goods orders declined by more than expected in October, S&P’s US Manufacturing PMI fell into contraction territory, and the University of Michigan’s Consumer Sentiment Index deteriorated across the board, with 5-10y inflation expectations reaching a fresh cycle high of 3.2%.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 19x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets imply very low odds of another 25bp rate hike, and that the Fed will begin cutting rates in mid-2024.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

Weekly Recap:

What a difference a week makes! Bond yields fell sharply on a relatively benign (compared to expectations at least) quarterly refunding plan from the US Treasury, a somewhat dovish-sounding Jerome Powell (again, relative to expectations) at the November FOMC meeting, and a monthly jobs report that saw lower-than-expected nonfarm payrolls and wage gains, as well as a tick higher in unemployment.

After very briefly trading above 5% intraday on October 23rd, 10y Treasury yields had fallen more than 40bp by the end of last week, with 30y yields lower by a similar amount. Meanwhile, futures markets had all but eliminated any expectations of an additional 25bp rate hike before the inevitable long pause, with odds settling at around 5% for the December meeting and topping out at 10% in January of 2024.

The abrupt fall in rates eased some of the recent pressure on P/E multiples. US equities surged 5+% on the week, with most benchmarks finishing higher every single day. Rate-sensitive sectors were the biggest beneficiaries, including real estate and longer-duration growth stocks. International stocks were better as well, but to a slightly lesser degree than domestics.

Behind the scenes amidst all of the recent rates-driven price volatility, Q3 earnings season has been coming in slightly better than expected. By the end of the week, 81% of the companies in the S&P 500 had reported Q3 numbers, with a blended earnings growth rate of +3.7% y/y, on revenue growth of +2.3% y/y plus 40bp of margin expansion to an average net margin of 12.0%. The pivot to earnings growth follows three consequence quarters were earnings for the S&P 500 were lower on a y/y basis.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply only a 10% chance of another 25bp rate hike in late 2023 / early 2024, followed by a pause.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

Weekly Recap:

Global risk premia expanded last week as the war between Israel and Hamas intensified, with an increase in rocket and missile attacks ahead of what appears to be an imminent ground invasion of Gaza by the Israeli army. Meanwhile, the US conducted air strikes inside Syria in retaliation for what it believes were Iran-backed drone attacks on US military bases and personnel in the area.

Treasury yields were volatile but finished the week lower, as the flight-to-safety temporarily outweighed concerns regarding upcoming supply. Bond investors were happy for the reprieve, as stable credit spreads passed the price gains from Treasuries through to corporates as well.

Equities were not so fortunate, as the deepening conflict in the middle east weighed on sentiment despite relatively healthy US macro data. Most US benchmarks were down 2-3% on the week, with international stocks faring slightly better.

The first estimate of Q3 US GDP was released last week, with the economy growing 4.9% q/q annualized. The outsized growth was fueled primarily by a combination of consumer spending, inventory build, and government expenditures. None of those factors appear sustainable at these levels, and economists expect growth to slow significantly in the coming quarters, even if recession is avoided. See the Chart of the Week for a GDP time series with consensus estimates for 2023/24).

Finally, on the inflation front, Core PCE for September (+0.3% m/m; +3.7% y/y) was in line with expectations. However, the University of Michigan’s estimate of consumers 1-year forward inflation expectations jumped to 4.2%, a development worth watching given the sensitivity of energy (and thus gasoline) prices to conflict in the middle east.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 17x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 1-in-3 chance of one additional 25bp rate hike in late 2023 / early 2024, followed by a pause.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

Weekly Recap:

After absorbing the initial shock of the brutal attacks by Hamas in Israel, market participants were mostly focused on incoming inflation data last week. In the aggregate, it is fair to say that inflation came in slightly above expectations:

* The Produce Price Index (PPI) rose 0.5% m/m vs. consensus of 0.3%

* PPI ex food & energy rose 0.3% m/m vs. consensus of 0.2%

* The Consumer Price Index (CPI) rose 0.4% m/m vs. consensus of 0.3%

* CPI ex food & energy rose 0.3% m/m, in line with consensus

Consumers’ inflation expectations are also on everyone’s mind, including the Fed’s, particularly after the spike in energy prices driven by the possibility of escalating armed conflict in Israel. Prices at the gas pump had already been elevated during the summer driving season in the US, and in the University of Michigan’s preliminary October survey, consumers’ 1y forward inflation expectations surged 60bp to 3.8%, the highest print in 5 months.

Rates markets reflected the general uptick in geopolitical risk aversion, with front-end yields mostly stable while belly and long bond yields fell. Rates had perhaps become a bit oversold of late, as concerns regarding a supply/demand imbalance for new Treasury issuance dominated the narrative, creating room for some bounce-back performance in the short run.

In US equities, earnings season kicked off with a number of big banks reporting better-than-expected results on Friday, as expanding net interest income more than offset relatively moribund loan growth and deal-making. As financials outperformed on Q3 results, energy and defense companies saw their stocks rise due to the events in Israel.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 1-in-3 chance of one additional 25bp rate hike before year-end, followed by a pause.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

Weekly Recap:

Labor market data dominated the narrative last week, sending bonds yields higher while producing mixed results for equities. The action got started on Tuesday, when the JOLTS report showed an unexpected 690k increase in open jobs, registering 9.6 million in the month of August. Bond yields rose immediately, the odds of another 25bp Fed rate hike prior to year-end jumped by nearly 10%, and stocks came under heavy selling pressure.

Markets promptly reversed course the very next day, when the ADP employment change for September (89k net payrolls added) came in well below expectations. Odds of another 2023 rate hike fell from slightly above 50% to below 40% on the news, and stocks enjoyed a moderate relief rally.

On Thursday, initial jobless claims held steady at just over 200k per week, extending their recent strength as employers hang onto recently hired workers even as revenue growth slows. Markets were fairly calm as all eyes looked ahead to Friday’s monthly jobs report from the BLS.

Finally, Friday’s nonfarm payroll print of +336k for the month of September surprised to the upside, initially sending rate hike odds and Treasury yields higher, and stocks lower. Under the covers, however, the report was a bit softer than the headline suggested, with average hourly earnings rising at a slower-than-expected +0.2% m/m, while unemployment (U3) held steady at 3.8%. As market participants digested the details, the initial knee-jerk negative reaction faded, leaving 2023 rate hike odds at slightly less than 50% to finish the week. Bond yields finished higher across the curve, especially in the belly and long end, suggesting that the current abundance of new Treasury supply may be a bigger factor than any labor market / inflation read-thru.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 50/50 chance of one additional 25bp rate hike before year-end, followed by a pause.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged

Weekly Recap:

Last week was a busy one on the macro front, with an abundance of fresh data:

* The FOMC left its policy rate unchanged at 5.25% to 5.50%

* US housing starts fell 11% sequentially to 1.28mn SAAR

* Residential building permits rose 7% sequentially to 1.54mn SAAR

* Initial jobless claims fell to 201k, the lowest print since January

* Continuing claims eased lower by 21k to 1.66mn, also the lowest since January

* S&P’s US Composite PMI was essentially flat at 50.1 (Mfg. was higher, Svc. lower)

* The Conference Board’s Leading Economic Index (LEI) fell 0.4% m/m

The decline in the LEI marked the 17th consecutive month that the index has moved lower, which is noteworthy given its strong historical track record in forecasting the US economy. The LEI is now down 7.6% on a y/y basis, and has fallen 10.5% from its recent peak at the end of 2021. Historically, y/y and absolute declines of this magnitude have always been shortly followed by a recession. See the Chart of the Week for a y/y time series.

Meanwhile, rates marched higher again last week due to a combination of factors:

* (Front end) The “dot plot” still implies one additional rate hike this year

* (Belly & long end) Concerns regarding the upcoming supply of Treasury issuance

Finally, September continues to live up to its reputation as a difficult month for stocks. The combination of higher rates, a resilient labor market, mixed signals on the strength of the US economy, and a determined Fed continue to weigh on equity valuations. The P/E multiple on the S&P 500 has lost a full turn this month, falling from 19x forward earnings at the end of August to 18x today.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy showed resilience in the first half of 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as progress on inflation has been slower than hoped. Futures markets now imply a roughly 50/50 chance of one additional 25bp rate hike before year-end, followed by a pause.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 12 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

Weekly Recap:

Fresh inflation data for the month of August did little to change the narrative last week. Although a supply-driven spike in energy prices drove the headline numbers higher, the disinflationary trend in core inflation remains intact. This is true for both consumer (CPI) and producer (PPI) prices:

* Headline CPI was +0.6% m/m and +3.7% y/y

* Core (ex food and energy) CPI was +0.3% m/m and +4.3% y/y

* Headline PPI was +0.7% m/m and +1.6% y/y

* Core PPI was +0.2% m/m and +2.2% y/y

All of this data was very close to consensus expectations, and Fed Funds Futures markets were largely unmoved by it. Futures continue to imply a slightly less than 50/50 chance of one additional rate hike prior to year-end, most likely at the December meeting if it occurs at all, followed by a multi-meeting pause.

Rates markets were soft despite the incoming data, particularly in the belly and long end of the curve where yields rose 7-8bp. Investment grade credit spreads remained stable near long-run averages, passing the price declines from Treasuries through to high quality corporates.

Stocks were mixed against the relatively calm macro backdrop. Tech stocks finished lower on the week, in part due to somewhat disappointing results from Oracle (relative to very lofty expectations at least) that temporarily dented investor enthusiasm for A/I story names. Most other sectors finished close to flat or slightly higher on the week. International stocks outperformed, but continue to lag the US on a YTD basis.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy showed resilience in the first half of 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in the second half of 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 19x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as progress on inflation has been slower than hoped. Futures markets now imply that the Fed Funds overnight interest rate will remain unchanged at 5.25-5.50% until at least March of next year.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 12 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

Weekly Recap:

September has often been a seasonally weak period for stocks, and so far 2023 has been no exception. Going back more than 100 years, there are only three calendar months with negative average price returns for the S&P 500: February at -0.14%; May at -0.04%; and September which is by far the lowest at -1.16% (see the Chart of the Week for monthly averages for the S&P since 1928). If instead we use median instead of average, September is the only month with a negative return (-0.56%) across more than 100 years of data. Theories abound as to whether this phenomenon is real, and attributable to factors that will persist in the future, or is merely noise. Either way, 2023 has followed the typical pattern of post-Labor Day weakness thus far.

One possible cause of weakness in stocks over the past week has been rates, which moved higher on Wednesday of last week following a blowout ISM Services PMI report for the month of August. All components of the report were stronger sequentially and well ahead of consensus, including the much-watched Prices Paid index which rose for the 2nd month in a row. ISM’s Manufacturing PMI for August was released a day prior and was generally weaker, but the Prices Paid component of that report also rose for a second straight month.

Investors responded to the stronger services data and upward trends in prices paid by adding roughly 10% to the odds of a 25bp rate hike at the November FOMC meeting. Meanwhile, the Treasury yield curve moved higher by 5-10bp, with the inversion deepening slightly as front end yields were more heavily impacted.

In the coming week the market will digest fresh inflation data (CPI, PPI, and import/export prices) for August, which will surely impact rates and stocks anew.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy showed resilience in the first half of 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in the second half of 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 19x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as progress on inflation has been slower than hoped. Futures markets now imply that the Fed Funds overnight interest rate will remain unchanged at 5.25-5.50% until at least March of next year.

Inflation

After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 12 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.