Market Overlooks Geopolitical Risks as it Debates Fed Policy
Photo Credit: David Watkis, Unsplash
Weekly Market Recap for October 13, 2023
Equity markets were willing to overlook geopolitical tensions this week, with investors focusing on monetary policy back home. A central theme was the debate over the recent surge in Treasury yields and how the subsequent tightening of financial conditions will impact the Fed's policy stance. Yields plunged early in the week before retracing a portion of their decline later in the week, which kept the major bond indices volatile. The Utility and Technology sectors emerged as the top performers, suggesting a defensive undertone for the week. At the same time, continued concerns about the impact of GLP-1 weight-loss drugs on food and snack consumption weighed on Consumer Staples. Despite the ongoing Middle East conflict, oil ended the week only slightly higher.
Market Reaction to Middle East Conflict
The surprise attack by Hamas on Israel and the subsequent military response raised concerns about market volatility. Markets are monitoring the potential impact on oil supplies due to concerns that a wider conflict could involve major oil-producing nations. The prices of WTI and Brent traded higher early in the week. Investors were already concerned about rising oil prices over the summer and the subsequent rise in inflation, which could extend the tightening cycle. We think concerns about oil supply are overdone due to the darkening macro outlook and the potential Saudi Arabia-U.S. oil-for-security deal (Iran's involvement in the conflict may encourage Saudi Arabia to forge deeper ties with the US).
Strong September US Job Growth
Nonfarm payrolls grew by 336,000 last month, the strongest month of job growth since January. The prior two months were also revised higher after steady revisions throughout 2023. Industries with the most robust growth included Leisure/Hospitality (+96k), Government (+73k), and Health Care (+41k), although these industries have lagged coming out of the pandemic. The unemployment rate held steady at 3.8%, while average hourly earnings growth was 0.2% month-over-month, slightly below consensus. For now, the robust job growth supports the Fed's 'higher-for-longer' approach, as unemployment is a lagging indicator and hard to control once it starts rising.
2023 US Job Growth
Fedspeak Highlights the Case for No Further Rate Hikes
Multiple Fed presidents spoke this week, demonstrating the ongoing debate within the Fed. Most agreed that elevated inflation continues to be a major risk and stressed that the Fed should remain vigilant if economic activity shows signs of reaccelerating. However, multiple Fed presidents also acknowledged the recent move higher in long-term interest rates, which could tighten financial conditions and lessen the need for another rate hike. The market received the message loud and clear, and the probability of a rate hike at the November 1st meeting dropped from 27% on 10/6 to 13% on 10/10 as there is a strong case to be made that July was the last rate hike.
US Manufacturing PMI Moves Closer to Expansion
Interest Rates Retreat Lower
The Fedspeak caused Treasury yields to decline which provided relief to long-duration bonds and tightened credit spreads. The equity market's reaction was to immediately bid up stocks. However, even with this week's dip in yields, the recent rise in term premiums and real interest rates is still concerning. Borrowers are living off the low rates they locked in during the past few years, but risk and stress continue to build.
Weight-Loss Drugs' Impact Consumer Staples Sector
GLP-1 weight-loss drugs, such as the increasingly popular Ozempic, have sparked concerns about their effects on various industries. Food and beverage stocks have underperformed as investors ponder how these drugs may alter consumer behavior and impact industry revenues. Wall Street analysts are making attention-grabbing forecasts modeling the GLP-1 impact across other industries, with United Airlines estimated to save $80 million on fuel as passengers lose weight. The market always feels the need to be talking about something, and the current GLP-1 craze is another example of the power of narratives.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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