In the Coming Week:
- ISM Manufacturing and Services September report
- September job openings and ADP employment
- U.S. employment report
- Consumer confidence
- Durable-goods orders
- Personal income and personal spending
- Personal Consumption Expenditures Index and Core Personal Consumption Expenditures
The S&P 500 Index had its fourth consecutive weekly decline due to rising interest rates impacting investor sentiment. Utilities stocks fell the hardest, while energy stocks performed better. Smaller indices like the S&P MidCap 400 and the Russell 2000 eked out gains, although they had underperformed larger caps earlier in the year. The TSX slid in the week despite a 1% gain in oil prices. Higher oil prices raised concerns about inflation, leading to a bond sell-off. There were also worries about a possible U.S. government shutdown, which dampened investor sentiment. The yield on the 10-year U.S. Treasury briefly went above 4.6% before easing slightly. Despite this, yields lowered after positive inflation data from the eurozone, and the U.S. Municipal and high-yield bonds faced selling pressure. In Europe, the STOXX Europe 600 Index declined by 0.67% in local currency terms. Concerns over extended periods of higher interest rates and a sluggish Chinese economy drove this drop. Major European indices followed suit, with France’s CAC 40 down 0.69%, Germany’s DAX falling 1.10%, Italy’s FTSE MIB sliding 1.16% and the U.K.’s FTSE 100 losing 0.99%.
In August, the Census Bureau reported sales of newly built homes in the U.S. declined by 8.7% to an annual rate of 675,000 on Tuesday – primarily due to elevated interest rates and high home prices, which reduced buyer demand. This figure was below the Wall Street expectations of 695,000. New home sales are now at their lowest level since March 2023. The Midwest region experienced the sharpest decline in sales. The median sales price for new homes in August decreased to $430,300, and the supply of new homes for sale increased by 11.4%, resulting in a 7.8-month supply. Only the Northeast saw an increase in new home sales, while the rest of the U.S. saw declines, with the Midwest experiencing a 17.2% drop. Despite these challenges, new home sales are up 5.8% compared to the previous year. Home builders are becoming more uncertain about the future, as mortgage rates remain high and credit conditions tighten. Their confidence has decreased, and mortgage rates continue to rise, possibly leading to lower new home prices in the coming months.1
The Conference Board Consumer Confidence Index fell to 103.0 in September, down from 108.7 in August. This decline is the second consecutive drop and reflects concerns about rising interest rates, persistent inflation and political uncertainties. The Present Situation Index slightly increased, which measures current business and labor conditions. In contrast, the Expectations Index, reflecting the short-term outlook for income, business and labor conditions, fell below 80, historically signaling a potential recession. Consumer worries about an impending recession have risen. Dana Peterson, Chief Economist at The Conference Board, noted that consumers’ concerns centered around increasing prices, particularly for groceries and gasoline, as well as political issues and higher interest rates. Assessments of the current situation were mixed, with some consumers seeing improvements in business conditions and job availability, but also more viewing jobs as “hard to get” and expressing concerns about family finances. Expectations for the next six months declined, reflecting less confidence in future business conditions, job availability and incomes. The proportion of consumers considering a recession “somewhat” or “very likely” increased in September. In terms of current business conditions, fewer consumers viewed them as “good,” while fewer also saw them as “bad.” Meanwhile, the labor market outlook was slightly more optimistic, with more consumers perceiving jobs as “plentiful,” and more seeing jobs as “hard to get.” Short-term business conditions and labor market outlooks were less optimistic, and consumers were more pessimistic about their short-term income prospects. Consumer confidence remains fragile, with concerns about the economy’s direction and potential challenges ahead.2
In August, orders for durable goods in the U.S. increased by a stronger-than-expected 0.2%, contrary to the forecasted 0.5% decline. However, this increase was primarily driven by higher defense spending on replenishing military hardware sent to Ukraine. Excluding defense, durable goods orders fell by 0.7%. Excluding transportation, new orders increased 0.4%. Nevertheless, overall business investment remains weak due to rising interest rates and the lingering risk of recession. Specifically, orders for commercial planes dropped by 16% in August, primarily due to Boeing’s impact on the headline number. Auto dealers reported a 0.3% increase in orders. Excluding transportation, orders increased by a modest 0.4%, driven by higher demand for metal parts, machinery, computers and electrical equipment. While the significant increase in core orders was somewhat unexpected, the sustainability of this growth remains uncertain. The industrial sector of the economy is expected to face challenges as high-interest rates persist, which could reduce demand for major purchases and maintain the risk of a recession. Higher borrowing costs typically dampen the economy, leading to reduced business spending and investment. Economists anticipate that the industrial sector will continue to face headwinds for the remainder of the year, with tighter credit conditions and weakening economic growth putting additional pressure on investment and overall economic performance.3
In the week ending September 23, the number of initial claims for unemployment benefits in the U.S. was 204,000 – a slight increase of 2,000 from the previous week’s revised level. Last week’s figure was revised by 1,000, from 201,000 to 202,000. The 4-week moving average, which provides a more stable view, stood at 211,000, showing a decrease of 6,250 from the previous week’s revised average. Additionally, the total number of continued weeks claimed for benefits in all programs, for the week ending September 9, was 1,669,542, marking a decrease of 9,347 from the previous week’s data. Comparatively, in the same week in 2022, there were 1,302,447 weekly claims filed for benefits in all programs. This data suggests some fluctuations in unemployment claims and indicates a decrease in the number of individuals seeking continued benefits compared to the previous year.4
Consumer spending in the U.S. increased by 0.4% in August, as reported by the government, meeting analysts’ expectations. However, this increase was partly due to higher gas prices, which impacted household budgets. In July, spending had surged by 0.9%, driven by Amazon’s Prime Day sale, which may have shifted some usual August spending to the previous month. Consumer spending is a crucial driver of the U.S. economy, although it slowed to a modest 0.8% annual pace in the second quarter, following a more robust 3.8% in the first quarter. Incomes also rose by 0.4% in August. Americans spent more on energy-related products and allocated more to necessities like housing, utilities, and medical care. Adjusted for inflation, consumer spending showed minimal growth in August. The U.S. savings rate decreased from 4.1% to 3.9%, indicating reduced financial reserves among households. The PCE price index, a key inflation gauge for the Federal Reserve, rose by 0.4% in August, primarily due to higher gas prices. The price index rose 3.5% yearly, 0.1% higher than the previous month. The Core PCE, excluding food and energy, rose 0.1% and, year over year, fell to 3.9% from 4.3% in July. Overall, there are indications that consumers are feeling the impact of higher interest rates imposed by the Federal Reserve to combat inflation. Home sales have declined, and the cost of big-ticket items like cars has risen. While incomes are increasing faster than inflation, the strong labor market and low unemployment rate continue to support the current economic expansion. Looking forward, analysts anticipate a slowdown in consumer spending in the coming months as job and wage growth moderates, and high-interest rates and inflation persist as challenges.5
On Friday, the University of Michigan’s final consumer sentiment reading revealed sentiment in the current month remained relatively stable, with only a slight decrease of 1.4 index points compared to August. It is still 16% higher than the same period last year. This stability was due to a slight decline in consumer expectations about their finances, offset by a modest improvement in expected business conditions. Consumers are still determining the economy’s future due to factors like the potential federal government shutdown and labor disputes in the auto industry. They reserve judgment on whether economic conditions have significantly changed until more information becomes available. Year-ahead inflation expectations decreased from 3.5% last month to 3.2% this month, marking the lowest reading since March 2021. This is higher than the 2.3-3.0% range seen in the two years before the pandemic. Long-term inflation expectations are at 2.8%, falling below the narrow 2.9-3.1% range for only the second time in the last 26 months. In comparison, long-term inflation expectations were between 2.2 and 2.6% in the two years before the pandemic.6
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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