Weekly Market Update: Market Volatility Amid Rising Rates

In the Coming Week:

  • Consumer Price Index and Core CPI
  • Producer Price Index and Core PPI
  • U.S. Retail Sales
  • Industrial production and Capacity utilization

Weekly Highlights:

  • Factory orders
  • S&P final U.S. services PMI
  • Wholesale inventories
  • Consumer credit

During the holiday-shortened week, stock markets closed lower, with rising interest rates influenced by some positive economic indicators. Growth stocks performed better than value stocks, and large-cap companies outperformed small-cap ones by a wider margin. A notable decline in Apple, the most heavily weighted stock in the S&P 500 Index, contributed to the overall market decline. This drop followed news that Chinese government employees would no longer use iPhones, as well as concerns about the higher pricing of the upcoming iPhone 15 compared to current models. Additionally, declines in NVIDIA and other chipmakers put pressure on the market indices. Although not particularly busy, the week’s economic calendar impacted sentiment positively, with the Institute for Supply Management’s report on August services sector activity unexpectedly reaching its highest level since February. Despite oil staging a rebound, gaining 2% in the week, the S&P/TSX followed the other major indices. European indices slipped lower on fears that higher interest rates could slow down the economy. The U.K. gained marginally in the week.

On Tuesday, the U.S. Commerce Department reported July new orders for manufactured goods declined by $12.7 billion or 2.1% to reach $579.4 billion, following four consecutive months of increases. On the other hand, shipments continued to rise for the third consecutive month, increasing by $2.9 billion or 0.5% to reach $577.2 billion. Unfilled orders increased by $7.2 billion or 0.5% to $1,332.0 billion, marking the seventh increase in the last eight months. The unfilled orders-to-shipments ratio rose to 6.80 from 6.74 in June. Inventories, which had decreased for two consecutive months prior, increased slightly by $0.6 billion or 0.1% to reach $852.5 billion. The inventories-to-shipments ratio remained unchanged from June at 1.48.1

On Wednesday, the ISM (Institute for Supply Management) barometer, measuring business conditions in U.S. service industries, including restaurants and hotels, strengthened in August to 54.5% – up from 52.7% in the previous month. The latest reading marked the highest level since February and exceeded economists’ expectations of a drop to 52.5%. This is the eighth consecutive reading above the 50% threshold, indicating economic expansion.2

Key details from the report include:

  • Activity improved to 57.3% in August from 57.1% in the previous month.
  • The new orders index increased by 2.5% points to 57.5%.
  • The employment index rose by four percentage points to 54.7%.
  • Prices rose by 2.1% points to 58.9%.
  • Thirteen out of 18 industries reported growth in August.

A separate reading on the service sector from S&P Global Market Intelligence showed a slowdown in growth for August, with the S&P Global U.S. services PMI falling to 50.5, down from 52.3 in the previous month and the slowest pace in seven months.3 Despite mixed signals from other surveys, the service sector has remained resilient. Analysts expect this trend to continue, although any signs of weakening would be significant since services and consumer spending have been major drivers of growth in the U.S. economy.

The Bank of Canada has decided to maintain its target for the overnight rate at 5%, with the Bank Rate at 5.25% and the deposit rate at 5%, while also continuing its quantitative tightening policy. This decision comes in a global economic landscape marked by decreasing inflation in advanced economies, although core inflation remains elevated. Major central banks are focused on restoring price stability. Global growth slowed in the second quarter of 2023, mainly due to a significant deceleration in China, influenced by ongoing weaknesses in the property sector. The Canadian economy is experiencing weaker growth, which is seen as necessary to alleviate price pressures. Economic growth sharply decelerated in the second quarter, impacted by factors like declining consumption growth, reduced housing activity, and wildfires in various regions. Household credit growth also slowed due to higher interest rates. Despite a gradual easing in the labor market, wage growth remained around 4-5%. Inflationary pressures persist, with CPI inflation at 3.3% in July, reflecting broad-based factors. The Bank is concerned about the persistence of underlying inflationary pressures but remains prepared to raise the policy interest rate further if necessary to achieve its 2% inflation target. The Bank’s commitment is to restore price stability for Canadians.4

In the week ending September 2, initial jobless benefit claims in the United States dropped by 13,000 to 216,000, marking the lowest level since mid-February. This positive development defied economists’ expectations, as they had anticipated an increase to 230,000, and continues a four-week trend of declining claims. In addition, the number of individuals already receiving jobless benefits in the week ending August 26 decreased by 40,000 to 1.68 million. The four-week moving average of initial claims also reached its lowest point since July, falling by 8,500 to 229,500. On an unadjusted basis, claims decreased to 190,190 during the week.5 The latest jobless benefit claims data supports the view of a strong hiring trend with minimal signs of companies laying off workers. Despite expectations of higher claims, the data does not suggest a significant uptick in layoffs, and unique factors can often explain any brief periods of elevated counts.

On Friday, the Commerce Department reported July U.S. wholesale inventories declined by 0.2%, marking the second consecutive monthly decrease – contrary to economists’ expectations of a 0.1% fall. However, sales showed a positive trend, increasing by 0.8% in July, fully reversing a 0.8% decline in June. This marks the first monthly sales gain after four consecutive declines and represents the largest increase in over a year. Despite this improvement, sales are still 4.2% lower compared to July 2022. The inventory-to-sales ratio dropped to 1.39 months in July, down from 1.41 months in the prior month, reaching its lowest level since February. This ratio steadily increased from a lower 1.33 months in July 2022.6 Economists closely monitor the inventory-to-sales ratio as higher inventories could lead companies to lower prices, potentially cooling inflation. Conversely, excess unwanted backlogs in inventory could signal an economic slowdown.

The Federal Reserve reported on Friday that, in July, total consumer credit in the U.S. increased by $10.4 billion – down from a revised gain of $14 billion in the previous month. This growth equates to a 2.5% annual rate, slower than the revised 3.4% gain seen in the prior month. Economists had expected a larger increase of $16 billion. Consumer credit growth has declined, contrasting with a year ago when it had risen by $28.3 billion as individuals relied on credit to cope with rising prices.

Key details include:

  • Revolving credit, which includes credit cards, rebounded with a 9.2% increase in July after a rare 0.8% drop in June, marking the first decline since April 2021.
  • Nonrevolving credit, typically consisting of auto and student loans, saw a modest 0.3% increase in July, a slowdown from the 4.8% growth rate in the prior month. This category is less volatile.7

It’s important to note that the Federal Reserve’s data does not encompass mortgage loans, which constitute the largest portion of household debt. Overall, consumer spending has shown improvement in the third quarter, although there are indications of strain among low-income workers. Despite this, overall credit conditions appear relatively stable following the pandemic. Some Federal Reserve officials believe that the excess savings accumulated during the stay-at-home period may be diminishing.









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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