Weekly Market Update: Market Volatility Amid Fed’s Hawkish Tone and Mixed Economic Signals

In the Coming Week:

  • Consumer confidence
  • Durable-goods orders
  • Personal income and personal spending
  • PCE index and Core PCE

Weekly Highlights:

  • Housing starts and existing home sales
  • U.S. Fed interest rate decision and news conference
  • S&P Flash U.S. services and manufacturing PMO

North American equity markets faced a challenging week, with major indices declining due to concerns over the Federal Reserve’s hawkish stance and rising U.S. Treasury yields. The S&P 500 Index saw its largest one-day loss in six months and closed the week with its third consecutive decline. Investors were worried about higher interest rates and expressed concerns about the impact of the United Auto Workers’ strike and the potential for a U.S. government shutdown. Additionally, some investors engaged in tax-loss harvesting as the fiscal year-end approached, potentially contributing to the selling pressure. The STOXX Europe 600 Index declined by 1.98% in Europe, as central banks indicated that high interest rates would persist for some time. Higher oil prices and weak business activity data further clouded the economic outlook. Major European country stock indexes also experienced losses, with France’s CAC 40 down by 2.67%, Germany’s DAX losing 2.26% and Italy’s FTSE MIB slipping 1.13%. However, the U.K.’s FTSE 100 remained relatively stable in local currency, benefiting from a weaker U.K. pound against the U.S. dollar. This depreciation of the U.K. currency supports the FTSE 100, which includes many multinational companies with overseas revenues.

On Tuesday, the Census Bureau and the Department of Housing and Urban Development reported August building permits for privately-owned housing units were issued at an annual rate of 1,543,000, showing a 6.9% increase compared to the revised July rate of 1,443,000. However, this rate was 2.7% lower than the August 2022 rate of 1,586,000. Single-family permits in August stood at 949,000, a 2.0% increase from the revised July figure of 930,000. Additionally, permits for units in buildings with five units or more were at a rate of 535,000 in August.

Housing starts for privately-owned units in August had an annual rate of 1,283,000, marking an 11.3% decrease from the revised July estimate of 1,447,000 and a 14.8% drop from the August 2022 rate of 1,505,000. Single-family housing starts in August were at a rate of 941,000, representing a 4.3% decline from the revised July figure of 983,000. Units in buildings with five units or more had a rate of 334,000 in August.

Housing completions for privately-owned units in August were at an annual rate of 1,406,000, reflecting a 5.3% increase from the revised July estimate of 1,335,000 and a 3.8% rise from the August 2022 rate of 1,355,000. Single-family housing completions in August were at a rate of 961,000, indicating a 6.6% decrease from the revised July rate of 1,029,000. The rate for units in buildings with five units or more in August was 433,000.1

In August, existing home sales in the United States experienced a mixed performance across different regions, resulting in an overall decline of 0.7% from the previous month, with a seasonally adjusted annual rate of 4.04 million. This marks a substantial 15.3% year-over-year decrease compared to August 2022, when sales were at 4.77 million. The National Association of REALTORS® (NAR) reported that all four major regions in the country recorded year-over-year sales declines. The median existing home price for all housing types in August rose to $407,100, a 3.9% increase from last year. Despite lower home sales, home prices continued to climb, indicating persistent demand and a supply shortage. Total housing inventory at the end of August amounted to 1.1 million units, reflecting a 14.1% decrease from the previous year. Unsold inventory represented a 3.3-month supply at the current sales pace, identical to July but slightly higher than the 3.2 months reported in August 2022. Properties typically remained on the market for 20 days in August, unchanged from July and up from 16 days in August 2022. First-time buyers accounted for 29% of sales, consistent with August 2022 but slightly down from 30% in July. Cash sales accounted for 27% of transactions in August, up from 26% in July and 24% in August 2022. Individual investors or second-home buyers, often responsible for cash sales, purchased 16% of homes, consistent with the previous month and year. Regarding regional breakdown, the Northeast saw no change in existing home sales, but they were down 22.6% from August 2022. The Midwest saw a 1.0% increase in sales but experienced a 16.4% year-over-year decline. Sales in the South decreased by 1.1% from July and were down 12.4% from the previous year. In the West, sales slumped by 2.6% from the previous month and were down 15.7% year-over-year. Median home prices varied across regions, with increases reported in all four regions compared to August 2022.2

On Wednesday, the Federal Reserve Open Market Committee (FOMC) concluded two days of meetings. It announced what is considered a hawkish pause, opting to keep interest rates unchanged but signaling that most officials anticipate one more quarter-point interest rate hike before the year’s end. Concurrently, the Fed conveyed an expectation of “higher for longer” interest rates by reducing its projection for rate hikes in 2024 from four to two. Consequently, officials foresee the benchmark rate remaining slightly above 5% by the end of the following year.

The Fed’s benchmark rate currently falls within a range of 5.25% to 5.5%, and this decision to maintain rates was unanimous. According to the Fed’s dot-plot forecast, 12 officials anticipate another 25-basis point rate hike in the current year, while seven expect no further hikes. Most economists had anticipated the Fed would commit to one more hike this year, though the Central Bank’s projection exceeds current market expectations.

Fed Chairman Jerome Powell emphasized that the decision to hike rates this year would depend on economic data, with the next meeting scheduled for late October. Officials believe they are nearing an appropriate rate level to gradually control inflation without triggering a recession. Only one of the 19 Fed officials foresees the need to raise rates beyond 6% in the coming year.

The Fed upgraded its assessment of the economy, describing activity as expanding at a “solid pace,” an improvement from the previous “moderate” growth assessment in July. Furthermore, they raised their growth forecasts for this year and the next. While core inflation projections for this year were revised down, the expectation for a 2.6% rate in 2024 was retained. Inflation is not projected to return to the Fed’s 2% target until 2026.

Overall, the more optimistic economic outlook suggests the Fed aims to achieve a rare “soft landing” by curbing inflation through higher interest rates without triggering a recession, a scenario Fed Chair Jerome Powell considers plausible. However, there remains division among Fed officials regarding the future path of interest rates, with some advocating for maintaining rates while others foresee further hikes.3

On Thursday, the U.S. Labor Department reported that initial jobless claims for the week ending September 16 decreased by 20,000 from the previous week to 201,000. The latest four-week average claims fell 7,750 from the previous week’s four-week average, which was the lowest since February. Claims for all benefit programs for the week ending September 2 decreased by 93,267 to 1,678,881.4

The U.S. economy exhibited a loss of momentum towards the end of the summer, as indicated by two S&P surveys. The S&P Flash U.S. Services-Sector Index declined to an eight-month low of 50.2, down from 50.5 in the previous month. Most Americans work in the service sector, which includes industries like healthcare, retail and hospitality. In contrast, the S&P U.S. Manufacturing-Sector Index slightly improved, rising to 48.9 from 47.9, though it remained in negative territory.

These S&P Global surveys are among the first monthly indicators to assess the state of the economy, with values above 50 signaling expansion and below 50 indicating contraction. It’s worth noting that these surveys have consistently portrayed the economy as weaker compared to other measures of U.S. growth.

Key survey details revealed that new orders, a predictor of future demand, experienced a significant decline. On a positive note, businesses increased their hiring, suggesting a relatively stable demand environment. Inflation saw a slight increase, primarily attributed to higher energy prices, though it remained considerably lower than last year. Manufacturers were more optimistic. The service sector has played a pivotal role in sustaining the U.S. economy’s expansion, while manufacturing has lagged. The ongoing strike by unionized auto workers could further dampen the manufacturing sector’s performance.5 Although the S&P indicators suggest deteriorating conditions, other reports indicate that the economy remains solid.







Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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