Weekly Market Update, October 11, 2021

Posted on October 12, 2021 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• Treasury yields rose last week as investors weighed a flurry of news from Capitol Hill and economic data releases. The 10-year picked up 13 basis points (bps) week-over-week to open Monday at 1.61 percent, the 30-year rose 12 bps to open at 2.16 percent, and the 20-year also gained 12 bps to open at 2.11 percent. The 2-year was up 4 bps to 0.31 percent while the 5-year climbed 11 bps to 1.06 percent. The front-end of the curve mostly normalized due to Congress reaching a deal to raise the debt ceiling, though 2-month bills moved relatively higher on a new December deadline.
• The three major U.S. indices increased last week, driven by a temporary solution to the debt ceiling issue. The Dow Jones Industrial Average led the way and was supported by moves in energy, financial, and industrial sectors. The Russell 2000 lagged as health care, consumer discretionary, and technology weighed on the index. REITs also struggled as investors now expect the Federal Reserve (Fed) to reduce its purchases of mortgage-backed securities, which should send mortgage rates higher. Despite a weaker-than-expected September employment report, the bar is expected to be low for the Fed to begin tapering these purchases. Meanwhile, the debt ceiling issue is set to come up again in December and leaves much to be determined surrounding the resolution method and implications for fiscal spending in the near term.
• On Tuesday, the ISM Services index for September was released. This widely followed measure of service sector confidence improved by more than expected during the month, rising from 61.7 in August to 61.9 in September against calls for a decline to 59.9. This is a diffusion index where values above 50 indicate expansion, so this result is a sign of faster growth for the service sector. High levels of pent-up consumer demand continue to support business confidence, and businesses have been scrambling to meet this demand through additional investment and hiring. Business confidence remains well above pre-pandemic levels and should help support continued business spending throughout the rest of the year. This strong result was especially impressive given the headwinds that businesses are facing due to rising input costs and labor shortages in some areas.
• On Friday, the September employment report was released. The report showed that 194,000 jobs were added during the month, down from the upwardly revised 366,000 jobs that were added in August and well below economist estimates for 500,000 additional jobs. This marks two consecutive months with slowing job growth and represents the fewest jobs added in a month since last December. Part of the slowdown in September was due to a relative lack of local government education hiring, as the sector lost 144,000 jobs on a seasonally adjusted basis. We also saw upward revisions to the July and August reports that added an additional 169,000 jobs over those two months; however, the continued slowdown in hiring in September is concerning. The underlying data was a bit more encouraging, as the unemployment rate fell from 5.2 percent to 4.8 percent and average hourly earnings increased notably. The unemployment rate improvement was partially due to folks leaving the workforce as the labor force participation rate fell. Overall, this was a relatively disappointing result that signals labor market recovery continued to slow despite declining public health risks.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	0.83%	1.99%	18.23%	28.16%
Nasdaq Composite	0.10%	0.92%	13.70%	26.75%
DJIA	1.27%	2.71%	15.17%	23.86%
MSCI EAFE	0.29%	–0.47%	7.84%	21.50%
MSCI Emerging Markets	0.85%	0.33%	–0.92%	14.27%
Russell 2000	–0.37%	1.32%	13.89%	37.73%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.50%	–2.05%	–1.17%
U.S. Treasury	–0.51%	–3.00%	–3.18%
U.S. Mortgages	–0.25%	–0.92%	–0.64%
Municipal Bond	–0.16%	0.63%	2.90%

Source: Morningstar Direct

What to Look Forward To
Wednesday will see the release of the September Consumer Price Index. This measure of consumer inflation is expected to show a 0.3 percent increase during the month and a 5.3 percent increase year-over-year. If estimates hold, the report would be in line with August’s headline consumer inflation growth. It would also represent a slowdown in month-over-month price growth when compared with data from earlier in the summer. Core consumer prices, which strip out the impact of volatile food and energy prices, are set to increase by 0.2 percent in September and 4.1 percent year-over-year. Throughout the year, consumer prices have seen upward pressure, as tangled supply chains and limited business inventories—combined with pent-up consumer demand—drive up prices. Although the Fed contends that much of the recent inflationary pressure will prove transitory, this monthly release will continue to be closely monitored given rising concerns.

Wednesday will also see the release of Federal Open Market Committee (FOMC) minutes from the Fed’s September meeting. Although no major changes to monetary policy were made at this meeting, the post-meeting press release and Fed Chairman Jerome Powell’s post-meeting press conference indicated the Fed is considering tapering asset purchases this year. The minutes are expected to give economists a better idea of the timing and pace of potential tapering efforts, which may be announced as soon as the Fed’s meeting in November. Currently, the Fed is purchasing $120 billion a month in Treasury and mortgage-backed securities to provide liquidity for the market. With the anticipated taper, however, these supportive measures are set to be reversed in the months ahead as the Fed moves to normalize monetary policy. Given the potential for a taper to cause market volatility, this release will be widely monitored.

On Thursday, the September Producer Price Index is set to be released. Producer prices are expected to increase by 0.6 percent during the month, down slightly from the 0.7 percent monthly increase recorded in August. On a year-over-year basis, producer prices are expected to increase by 8.8 percent in September, up from the 8.3 percent annual growth rate seen in August. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.5 percent during the month and 7.1 percent year-over-year. As is the case with consumer prices, producer prices have seen upward pressure this year due to high levels of demand and problems with supply. Producers have also had to contend with increased labor costs over the past few months as the shortage of available workers has led to increased wage growth.

On Friday, the September retail sales report is set to be released. Forecasts are for headline retail sales to decline by 0.3 percent during the month, following a better-than-expected 0.7 percent increase in August. Much of the anticipated slowdown is due to decreasing auto sales in September. Core retail sales, which strip out the impact of auto and gas sales, are expected to increase by 0.2 percent. If estimates hold, this report would mark two consecutive months with core retail sales growth, signaling that consumers continued to fuel the economic recovery despite lowered confidence in August and September. The total level of sales is well above pre-pandemic levels. Accordingly, any further growth in the months ahead would be a sign that consumers remain willing and able to spend and support ongoing economic recovery.

Finally, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for October. Confidence should increase modestly to start the month, as the index is expected to rise from 72.8 in September to 73.5 in October. If estimates hold, this survey would mark two consecutive months with improving confidence. Still, it would leave the index well below the post-lockdown high of 88.3 that we saw in April. Confidence fell sharply in August due to rising consumer concerns about the pandemic, higher inflation, and a slower economic recovery. While we’ve seen public health risks decline since August, inflation remains above normal levels and job growth continued to slow in September. Given these headwinds, it is unlikely we will see a swift boost in confidence until further progress is made in getting people back to work and reining in inflationary pressure.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network®

Weekly Market Update, October 4, 2021

Posted on October 5, 2021 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• The Treasury yield curve steepened last week as investors weighed the possibility of longer-term elevated inflation. The 10-year yield was unchanged week-over-week, opening on Monday morning at around 1.48 percent. The 30-year yield rose about 5 basis points (bps) to open at 2.05 percent, while the 20-year yield gained 4 bps to around 1.98 percent. The 2-year yield was unchanged at 0.27 percent, and the 5-year yield lost about 5 bps to 0.94 percent. The 4-week Treasury bills sold off on Friday as investors eye a late October deadline for Congress to raise the debt ceiling.
• Global equities were lower on the week with domestic growth and international among the hardest hit. A slew of factors led stocks downward, but the largest appeared to be the increase in bond yields, which hurt growth sectors such as health care and technology. The top-performing sectors were energy, financials, and materials. These sectors benefited from rising rates and potential longer-lasting inflation.
• Domestically, uncertainty came from Washington regarding the path for future fiscal policy and raising the debt ceiling. Elsewhere, logistical problems at ports and a lack of drivers in the U.K. have led to rising energy prices globally. Should these issues persist, investors may have to contend with threats to both future earnings and stagflation. In the wake of these rising prices, OPEC will meet this week to discuss potentially raising output.
• On Monday, the August durable goods orders report was released. Headline durable goods orders increased by more than expected during the month, with the report showing a 1.8 percent increase in orders against calls for a 0.7 percent increase. This result was largely driven by an increase in volatile commercial aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.2 percent against forecasts for a 0.5 percent increase. Core durable goods orders are often viewed as a proxy for business investment, so the continued growth in August was welcome despite the miss against expectations. This follows a 0.8 percent increase in core durable goods orders in July and now marks six consecutive months with core orders growth. Overall, this was a relatively encouraging report as it showed businesses continue to spend and invest—which is a good sign for overall economic growth in the month and quarter.
• Friday saw the release of the August personal income and spending reports. Spending increased by more than expected during the month, with the report showing a 0.8 percent increase in spending against calls for a 0.7 percent increase. This echoed the better-than-expected result for retail sales growth that we saw earlier in the month and was encouraging as it indicated consumers remained willing and able to go out and spend despite lowered consumer confidence levels. Personal income increased by 0.2 percent in August, which was in line with expectations. Personal income has been very volatile on a month-to-month basis throughout the pandemic, as shifting federal stimulus and unemployment payments have led to large monthly swings in average income. Looking forward, labor shortages and high levels of job openings should help support continued wage growth in the months ahead, which may support faster spending growth as well.
• We finished the week with Friday’s release of the ISM Manufacturing report for September. This widely monitored gauge of manufacturer confidence improved by more than expected during the month, with the index rising from 59.5 in August to 61.1 in September against calls for a decline to 59.5. This is a diffusion index where values above 50 indicate expansion, so this result indicates faster expansion for manufacturers than anticipated and left the index at a four-month high. Manufacturer confidence has remained well above pre-pandemic levels since the expiration of initial lockdowns last year and is a signal that manufacturing recovery continues in earnest (despite headwinds created by tangled supply chains and rising costs). High levels of consumer demand are expected to help support continued manufacturing growth in the months ahead, which would be a good sign for overall economic growth.

Equity Index	Week-to-Date		Month-to-Date	Year-to-Date	12-Month
S&P 500	–2.19%	1.15%		17.24%	30.77%
Nasdaq Composite	–3.19%	0.82%		13.59%	29.54%
DJIA	–1.36%	1.43%		13.72%	25.75%
MSCI EAFE	–3.13%	–0.76%		8.02%	25.08%
MSCI Emerging Markets	–1.43%	–0.52%		–1.67%	17.60%
Russell 2000	–0.24%	1.69%		14.31%	47.83%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	0.28%	–1.28%	–0.57%
U.S. Treasury	0.29%	–2.22%	–2.89%
U.S. Mortgages	0.18%	–0.49%	–0.26%
Municipal Bond	–0.01%	0.78%	2.71%

Source: Morningstar Direct

What to Look Forward To
On Tuesday, the August international trade report is set to be released. Economists expect the trade deficit to widen slightly from $70.1 billion in July to $70.5 billion in August. The previously reported advanced trade deficit for goods increased from $86.9 billion in July to $87.6 billion in August, so the anticipated widening of the overall trade deficit is understandable. The 0.8 percent increase in imports of goods drove the deficit for the goods trade, which offset a 0.7 percent increase in exports of goods. If estimates hold, this report would mark the third-largest monthly trade deficit on record, highlighting strong demand from the American consumer and the uneven global economic recovery from the pandemic. In the second quarter, trade served as a headwind to overall growth. Even if we get the anticipated, modest widening of the deficit, trade is expected to have a small, positive impact on overall economic growth in the third quarter.

Tuesday will see the release of the ISM Services index for September. This gauge of service sector confidence is expected to decline slightly, from 61.7 in August to 59.8 in September. This is another diffusion index, where values above 50 indicate expansion. So, if estimates prove accurate, this report would indicate continued expansion for the service sector. The service sector accounts for a large majority of overall economic activity in the country. Accordingly, even if the index falls modestly in September, the result would be a good sign for overall economic growth during the month and quarter. As has been the case with manufacturer confidence, service sector confidence has remained well above pre-pandemic levels since the lifting of initial lockdowns last year. Looking ahead, service sector confidence is expected to remain at levels that support continued growth.

We’ll finish the week with Friday’s release of the September employment report. Economists expect to see 513,000 jobs added during the month. This result would be a notable increase from the 235,000 jobs added in August but below the recent high of 1,053,000 jobs gained in July. We saw a steady acceleration in job growth between April and July of this year, driven by easing restrictions at the state and local level. In August, however, rising medical risks led to a slowdown in hiring. We saw medical risks start to decline in September, so a return to more robust job growth would be a welcome sign that the August slowdown was transitory. The underlying data should also show improvements, as the unemployment rate is expected to drop from 5.2 percent in August to 5 percent in September. This figure would represent the lowest unemployment rate since the start of the pandemic, demonstrating that the labor market recovery picked up steam in September.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

Weekly Market Update, September 27, 2021

Posted on September 27, 2021 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• The Treasury yield curve climbed following last week’s Federal Reserve (Fed) meeting, during which the central bank indicated tapering asset purchases may be warranted before year-end. The 10-year yield was up 17 basis points (bps), opening at 1.48 percent on Monday morning. The 30-year rose 15 bps to 2 percent, the 5-year gained 15 bps to 0.97 percent, and the 2-year was 6 bps higher at 0.28 percent.
• Domestic equities were slightly higher last week as the market shook off concerns surrounding the impact of Chinese real estate developer Evergrande and potential surprises from the Fed surrounding tapering. Equities began the week sharply lower as investors were concerned Evergrande’s default on its loans would yield a contagion effect across global financial markets for institutions with exposure to Chinese real estate. As the week progressed, equities rebounded as investors waited to see whether the company would find a way to make an $84 million interest payment within the allotted 30-day grace period. The current consensus is that the Chinese government will not bail out the firm but would prefer to limit surprises or a disorderly collapse. The Fed offered little surprise in its midweek meeting, stating only that tapering of the $120 billion per month in asset purchases may be necessary soon (though it did not specify how soon that might be). Energy, financials, and technology were among the top performers with REITs, utilities, and communications services among the laggards.
• On Monday, the National Association of Home Builders Housing Market Index for September was released. This gauge of home builder confidence increased modestly from 75 in August to 76 against calls for a decline to 74. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result indicates home builder confidence remained at levels that signal continued growth. Home builder confidence rebounded swiftly last year once initial lockdowns were lifted, as record-low mortgage rates, high levels of home buyer demand, and limited existing homes for sale helped support a surge in new home construction. Since then, home builder confidence has declined from the record highs at the end of 2020, due in large part to rising costs for materials and labor. Although lumber prices have started to normalize, input costs for home builders remain high due to supply chain disruptions and labor shortages. Looking forward, still-high levels of home buyer demand should keep home builder confidence in expansionary territory; however, high costs are expected to remain a headwind for home builders in the short term.
• On Tuesday, the August building permits and housing starts reports were released. These measures of new home construction increased by more than expected. Permits increased 6 percent against calls for a 1.8 percent decline, while starts increased 3.9 percent against calls for a 1 percent increase. Although permits and starts can be volatile on a month-to-month basis, they remained at levels that signal a healthy pace of construction. The increase in starts was largely driven by a 20.6 percent increase in multifamily homes, as the pace of single-family starts declined during the month. The increase in permits was also due to increased builder interest in getting multifamily units permitted. Rising housing costs and a return to more normal economic conditions are expected to support continued new home construction in the months ahead.
• On Wednesday, the August existing home sales report was released. Sales of existing homes fell 2 percent, slightly more than the expected 1.7 percent decline. Existing home sales increased notably at the end of 2020; however, so far this year, we’ve seen the pace of home sales pull back. With that being said, sales remain above pre-pandemic levels, as low mortgage rates and high levels of prospective home buyer demand continue to support the housing sector. The major headwind for the housing market is a lack of available homes for sale; the supply of homes for sale in August was 13.4 percent lower than one year ago. The lack of homes for sale and high levels of demand have also caused housing prices to rise throughout the year, which is another headwind for faster sales growth. Looking forward, we’ll likely need to see a noted increase in the number of homes for sale to see notably faster levels of sales growth.
• Wednesday also saw the release of the Federal Open Market Committee rate decision from the Fed’s September meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and there were no changes to interest rates at this meeting, as expected. Instead, the major focus was on the Fed’s asset purchase program, which currently consists of $120 billion per month in purchases of Treasury and mortgage-backed securities. While these quantitative easing measures helped support markets throughout the worst of the pandemic, some board members have recently started to discuss tapering asset purchases in the future. The news release from the meeting indicated that the Fed may be prepared to announce tapering plans as soon as its November meeting, provided the economic recovery continues. Although the full timing of the tapering plan remains unknown, this strong hint from the Fed that we may see asset purchases decline by the end of the year was a sign that its members believe the economy continues to recover and a gradual return to more normal monetary policy may be appropriate.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	0.52%	–1.40%	19.86%	39.26%
Nasdaq Composite	0.03%	–1.35%	17.34%	42.03%
DJIA	0.62%	–1.50%	15.28%	32.25%
MSCI EAFE	–0.26%	–0.45%	11.51%	31.51%
MSCI Emerging Markets	–1.01%	–3.08%	–0.25%	22.41%
Russell 2000	0.51%	–1.06%	14.59%	56.38%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.40%	–1.16%	–0.60%
U.S. Treasury	–0.67%	–2.11%	–3.09%
U.S. Mortgages	–0.28%	–0.64%	–0.31%
Municipal Bond	–0.33%	1.30%	3.07%

Source: Morningstar Direct

What to Look Forward To
On Monday, the August durable goods orders report was released. Headline durable goods orders increased by more than expected, going up by 1.8 percent against calls for a 0.7 percent increase. This result was largely driven by a rise in volatile commercial aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.2 percent against forecasts for a 0.5 percent gain. Core durable goods orders are often viewed as a proxy for business investment, so August’s continued growth was welcome despite the miss against expectations. Following the 0.8 percent increase in core durable goods orders seen in July, this report marks six consecutive months with core orders growth. Overall, the August report was relatively encouraging; it showed that businesses continue to spend and invest, which is a good sign for overall economic growth in the month and quarter.

On Tuesday, the Conference Board Consumer Confidence Index for September is scheduled for release. Consumer confidence is expected to increase modestly, with the index set to rise from 113.8 to 114.2. If estimates hold, the index would remain well above last year’s lockdown-induced lows, signaling healthy levels of consumer confidence. That said, we saw confidence decline in August due to rising medical risks, a slowdown in hiring, and rising inflationary pressure. Still, there is some evidence that consumer inflation started to cool in August, including the Consumer Price Index slowdown. Historically, higher levels of consumer confidence have supported faster spending growth. Any improvement for the index would be welcome, even if it’s only the modest uptick expected by economists.

Thursday will see the release of the initial jobless claims report for the week ending September 25. Economists expect to see 330,000 initial claims filed during the week, which would be an improvement from the 351,000 initial claims filed the week before (but slightly higher than the low of 310,000 initial claims recorded earlier in the month). Although we’ve made solid progress in getting initial claims down this year, the labor market recovery may be tested soon by less-supportive Fed policy. With many economists expecting the Fed to start tapering its asset purchases by year-end, the tailwinds from supportive Fed policies are set to diminish over the months ahead. Given the large number of folks still out of the labor force and the relatively high unemployment rate compared with pre-pandemic levels, employment and initial claims reports will continue to be closely monitored.

Friday will see the release of August personal income and spending reports. Spending is expected to increase by 0.7 percent, following a surprise 0.3 percent increase in July. The previously released August retail sales report showed spending on goods beat expectations, which helps explain the anticipated acceleration in spending growth. Personal income is expected to have increased by 0.2 percent in August following a 1.1 percent rise in July. Personal income growth has been highly volatile throughout the pandemic as shifting federal government payments have caused large monthly income swings. Strong wage growth is expected to offset the impact of more states pulling out from federal unemployment programs in August. Looking forward, labor shortages and high levels of job openings should support continued wage growth and increased spending.

We’ll finish the week with Friday’s release of the ISM Manufacturing index for September. This widely monitored gauge of manufacturer confidence is expected to decline from 59.9 in August to 59.5 in September. This is a diffusion index, where values above 50 indicate expansion, so this result would signal continued growth for the manufacturing industry. Last year, manufacturer confidence rebounded swiftly once initial lockdowns were lifted; even with a modest decline in September, the index should remain well above pre-pandemic levels. High levels of buyer demand supported manufacturing confidence throughout the year despite headwinds raised by supply shortages and higher prices. If estimates hold, this release will represent an encouraging signal that manufacturers remain confident despite industry headwinds. As is the case with consumer confidence, higher levels of business confidence have historically supported spending growth. If we get the high level of manufacturer confidence expected in September, this result will signal that manufacturing recovery remains on track.

Weekly Market Update, September 20, 2021

Posted on September 21, 2021 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• The Treasury yield curve flattened on a week-over-week basis as markets sought safety early Monday, following a sharp sell-off in Asia and in anticipation of this week’s Federal Reserve (Fed) meeting. The 10-year yield was down about 1 basis point to 1.32 percent. The 30-year fell about 5 basis points (bps) to 1.86 percent, while the 5-year gained 2 bps to about 0.83 percent and the 2-year was unchanged from last week at 0.20 percent.
• Domestic indices were mostly lower last week as markets remained unsettled amid a noisy backdrop. Investors are hoping for clarity on a tapering timeline out of this week’s Fed meeting. Many believe tapering will begin before year-end, but economic data has been volatile recently. August’s Consumer Price Index (CPI) and retail sales reports were surprisingly positive, but sentiment remains dampened by a weak labor market. On the fiscal side, House Democrats will push to suspend the debt ceiling this week as an October deadline looms large. Materials, utilities, and industrials lagged last week while energy, consumer discretionary, and financials outperformed. Markets opened sharply lower this week as seasonal weakness and fears of broader contagion from China Evergrande’s possible default gripped markets.
• On Tuesday, the CPI report for August was released. The report showed that the pace of consumer inflation slowed, with prices rising 0.3 percent against calls for a 0.4 percent increase. This is down from the 0.5 percent rise in consumer prices we saw in July. On a year-over-year basis, consumer prices increased 5.3 percent, which was in line with expectations and a modest decline from the 5.4 percent year-over-year consumer inflation rate from July. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.1 percent during the month and 4 percent year-over-year. As was the case with headline consumer inflation, core consumer prices increased less than expected in August. Airline fares, hotel rates, and used car prices all declined notably during the month. Although consumer price growth remains high on a year-over-year basis, the moderating inflationary pressure in August helps support the Fed’s belief that much of the recent price increases will prove to be transitory.
• Wednesday saw the release of the August industrial production report. Production increased 0.4 percent, which was slightly below economist estimates for a 0.5 percent increase. This follows a solid 0.8 percent increase in production in July and marks six straight months with rising production. The increase in production was largely due to a rise in utilities output, as Hurricane Ida negatively affected manufacturing and mining output. Given the hurricane’s timing at the end of August and start of September, the lingering effects from the storm are expected to serve as a similar headwind for mining in September. Manufacturing output increased 0.2 percent during the month, which was below economist estimates for a 0.4 percent increase. With that being said, July’s manufacturing output growth was upwardly revised from 1.4 percent to 1.6 percent, so the miss against expectations in August is not as bad as it first seems. All in all, this report showed that the rebound in industrial production continued during the month.
• Thursday saw the release of the August retail sales report. Sales increased 0.7 percent, which was significantly better than the 0.7 percent drop economists expected. Core retail sales, which strip out the impact of volatile auto and gas sales, were even more impressive, increasing 2 percent against calls to remain flat. This represents the best month for core retail sales growth since March’s stimulus-fueled surge. While the faster-than-expected sales growth during the month was a positive development, the details were less encouraging. Growth was largely driven by a surge in grocery sales and online shopping, which in turn likely reflects rising consumer concerns about the Delta variant. Spending at bars and restaurants was flat, which is another sign that rising health risks likely affected consumer spending decisions. Despite the rotation back toward stay-at-home spending, the better-than-expected increase in headline and core sales shows that consumers remain willing and able to spend.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for September. The report showed that confidence improved modestly to start the month, as the index increased from 70.3 to 71 against forecasts for an increase to 72. Consumer views on current economic conditions fell slightly to start September; however, future expectations saw some improvement. Consumers remain concerned about rising prices, as buying conditions for big-ticket items such as homes and cars worsened during the month due to high costs. Consumer one-year inflation expectations increased from 4.6 percent in August to 4.7 percent in September; however, five-year inflation expectations remained unchanged at 2.9 percent. Despite the modest improvement in confidence to start the month, the index remains well below its recent high of 88.3, set in April. Historically, improving consumer confidence has led to faster consumer spending growth, so the lackluster result in September may signal future weakness in consumer spending.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–0.54%	–1.91%	19.24%	34.01%
Nasdaq Composite	–0.46%	–1.38%	17.30%	38.90%
DJIA	–0.05%	–2.10%	14.58%	26.32%
MSCI EAFE	–1.38%	–0.20%	11.80%	26.32%
MSCI Emerging Markets	–0.96%	–2.08%	0.78%	18.23%
Russell 2000	0.45%	–1.57%	14.00%	46.45%

Source: Bloomberg, as of September 17, 2021

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	0.01%	–0.77%	–0.32%
U.S. Treasury	–0.16%	–1.59%	–2.45%
U.S. Mortgages	0.04%	–0.38%	–0.06%
Municipal Bond	0.11%	1.50%	3.33%

Source: Morningstar Direct, as of September 17, 2021

What to Look Forward To
On Monday, the National Association of Home Builders Housing Market Index for September was released. This gauge of home builder confidence increased modestly—from 75 in August to 76 in September—against calls for a decline to 74. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result signals continued growth of home builder confidence. Last year, this index rebounded swiftly once initial lockdowns were lifted as record-low mortgage rates, high levels of home buyer demand, and limited existing homes for sale supported a surge in home construction. Home builder confidence has declined since then, largely due to rising material and labor costs. Although lumber prices have started to normalize, input costs for home builders remain high due to supply chain disruptions and labor shortages. Looking forward, continued high levels of demand should keep home builder confidence in expansionary territory. In the short-term, however, high costs are expected to remain as a headwind for home builders.

On Tuesday, the August building permits and housing starts reports are set to be released. Permits are expected to decline by 2.2 percent, following a 2.6 percent increase in July. Starts are set to rise by 1 percent, after declining by 7 percent in July. Both measures of new home construction can be volatile on a month-to-month basis. Single-family housing starts have been a particular highlight as shifting home buyer preferences for more space caused a surge in new single-family construction over the past year. Looking forward, rising rents and a return to more normal economic conditions may support an increase in multifamily construction. Throughout the pandemic, this sector has generally lagged compared with single-family housing growth.

On Wednesday, the August existing home sales report is set to be released. Sales of existing homes are expected to fall by 2.3 percent, following a 2 percent increase in July. At the end of last year and start of this year, existing home sales surged. Throughout much of this year, however, the limited supply of existing homes for sale and rising prices have negatively affected sales growth. That said, the pace of existing home sales is expected to remain well above pre-pandemic levels, highlighting the continued strength of the housing market. We saw the supply of homes for sale increase in July, which could signal the housing market’s stabilization following last year’s surge in sales. Still, the number of homes for sale remains relatively low on a historical basis. This factor is expected to dampen the pace of overall sales growth until more homes become available for sale.

Wednesday will also see the Federal Open Market Committee rate decision from the Fed’s September meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and economists do not expect to see any hikes until 2023 at the earliest. The meeting’s focus will be on the asset purchase program, which currently sees the Fed buying a combined $120 billion in Treasury and mortgage-backed securities a month. These purchases have been used to support the markets throughout the course of the pandemic. Currently, however, there is speculation that the Fed may be ready to start tapering purchases. Some Fed members have come out publicly in favor of tapering asset purchases by the end of the year, but no timeline for tapering has been announced yet. The September meeting will be important in terms of guiding market expectations for the Fed’s tapering plans. Although the timing of these efforts is unknown, the Fed is widely expected to slow the pace of asset purchases gradually to minimize market impact.

We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending September 18. Economists expect to see the number of initial unemployment claims decline modestly from 332,000 to 320,000. If estimates prove accurate, this report would represent the second-fewest initial claims in a week since the start of the pandemic. While claims can be volatile on a weekly basis, the four-week moving average for initial claims would be set to hit a new pandemic-era low if estimates hold. This would highlight the continued labor market recovery in September. Declining medical risks and loosened restrictions on consumers and businesses supported a reduction in weekly layoffs throughout the spring. Recently, however, labor shortages have also helped drive the number of weekly layoffs down. Given the shortage of potential replacements, businesses remain reluctant to lay off workers.