Stocks stuck in neutral as investors await key inflation reports

ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL

WEEKLY MARKET PERSPECTIVES — September 11, 2023

Energy rises to the top of performance charts

Elsewhere across S&P 500 sectors, Energy (+1.4%) rose to the top of the performance charts on the week, as West Texas Intermediate (WTI) oil closed at $87.51 per barrel, gaining +2.3% last week and hitting its highest level since November 2022. Announcements of longer-than-expected production cuts from Saudi Arabia and Russia helped place a bid under crude and contributed to sending Energy stocks higher. Gold ended lower last week following two straight weeks of gains.

Investors seek relative safety of the U.S. dollar  

On the currency front, the U.S. Dollar Index again moved higher last week, recording its eighth straight weekly gain and hitting its highest level since March. Conversely, the euro has fallen for eight consecutive weeks and is on its longest losing streak versus the dollar since 2014, when the European Central Bank (ECB) took its key deposit rate into negative territory for the first time. Today, slowing economic growth in Europe and concerns the Eurozone may soon be headed for a recession have currency traders flocking to the safety of the U.S. dollar. From a stock perspective, the S&P 500 Index has outperformed the Euro Stoxx Index by roughly +1.0% over the last month.

In China, the offshore yuan hit 7.36 per U.S. dollar last week, near its lowest level since the inception of the offshore market in 2010. Late last week, the People’s Bank of China (PBoC) set the yuan fixing rate at a two-month low, driving speculation the central bank is comfortable seeing China’s currency gradually depreciate against the U.S. dollar. Similarly, the on-shore yuan weakened to a 16-year low last week. Increasing concerns about China’s growth trajectory, property market stress, growing trade issues with the West, and divergent monetary policies from the U.S. have investors on guard regarding China. As a result, over the last month, the Hang Seng Index has underperformed the S&P 500 by over 5.0%, while China’s Shanghai A Share Index has underperformed by over 3.5%. Bottom line: Increased uncertainty regarding growth in Europe and China and the still solid economic picture in the U.S. have investors seeking the relative safety of the U.S. dollar, which has also translated into U.S. stock outperformance versus Europe and China over recent weeks.

Stock prices susceptible to periods of volatility until investors get a handle on rate policy 

U.S. Treasury prices were generally weaker across the curve last week, though yields moderated by Friday’s close, and after the 2-year yield rose back above 5.0% mid-week. Notably, while off its lows, the 10-year and 3-month yield curve inversion is still deeply inverted today, keeping recession risks elevated. Although conditions specific to the current environment may cause this recession indicator (i.e., an inverted yield curve) to be less valuable today, the upward movement in stock prices this year does not suggest the inversion in the yield curve is useless information or that a recession has been avoided. Investors are best served recognizing that the continued inversion in the yield curve points to an abnormal rate environment and that some level of caution across a portfolio is prudent given other macro uncertainties.

Back to stocks, the S&P 500 Index has moved around quite a bit over the last month without really going anywhere. Over the last month, the S&P 500 is basically flat on a price-alone basis. During that period, the Index moved down from as low as the 4,369 level near the middle of August to as high as above the 4,500 level at the end of August. Last week's more defensive tone in the market came from a few items. First, yields are again on the rise, which is pressuring long-duration assets like growth stocks. Next, August ISM services data beat expectations as activity expanded for the eighth straight month. New orders, business activity, supplier deliveries, prices paid, and employment components rose in August, suggesting a strong services economy could prompt the Fed to tighten monetary policy later this year. In our view, the ISM services data appears consistent with the Atlanta Fed’s GDPNOW model, which currently forecasts Q3 GDP at an eyepopping +5.6%. And while the Fed’s latest Beige Book pointed to modest economic growth in July and August, takeaways on the consumer, housing, and loan demand was mixed with positives and negatives. Here, too, the added color on the economy last week did not definitively remove the possibility of further rate hikes later this year, which is what investors likely want to see to push stock prices higher from here. Bottom line: Until investors can get a better handle on rate policy heading into next year, stock prices may be susceptible to periods of volatility, particularly if stronger-than-expected economic data implies the Fed has more work to do.  

The week ahead

On Monday, U.S. exchanges will commemorate the 22nd anniversary of the 9/11 terrorist attacks with a moment of silence to honor the victims, survivors, and their families. This week’s inflation reports will be the key economic items to watch, as the data should essentially lock in a Fed rate pause at the September meeting. Wednesday’s release of the August headline Consumer Price Index (CPI) is expected to show an acceleration from July levels driven by higher gasoline prices. FactSet estimates forecast headline CPI rose +0.6% month-over-month in August versus the +0.2% pace in July. On a year-over-year basis, August headline CPI is expected to jump to +3.6% from the +3.2% pace in July. However, core CPI in August is expected to match July’s month-over-month level of +0.2% and fall to +4.3% from +4.7% in July. Bottom line: Consumer prices are expected to drop on a core basis for the third straight month. Notably, headline and core consumer inflation are well off their 40-year highs, as each has trended in the right direction all year. Though some stickiness across core components and elevated energy prices will likely keep the Fed attentive to inflation risks through the rest of the year, this week’s reports shouldn’t alter the market’s overwhelming expectation that the Fed pauses rate hikes at next week’s meeting. Also, on the inflation front this week, August Producer Price inflation (PPI) reports are out on Thursday. Prices at the wholesale level are expected to increase modestly from July levels, driven partly by higher energy costs.

The New York Fed’s latest Survey of Consumer Expectations (Monday), August retail sales (Thursday), preliminary September Michigan Sentiment (Friday), and the September 14th United Auto Workers (UAW) contract deadline with automakers will be the other key items that drive market action this week. If the Big Three domestic automakers (General Motors, Ford, and Stellantis) do not reach a labor agreement with the UAW by September 14th, the union’s nearly 150,000 members across all three automakers have threatened to strike in unison. Contract proposals by the automakers to the UAW have thus far been summarily rejected. Outside of a last-minute deal, the prospects for a UAW strike appear high, in our view. The Anderson Economic Group estimates a ten-day UAW strike against all three automakers could cost the U.S. economy $5.6 billion. Four years ago, a UAW strike against GM alone lasted six weeks, costing the company $3.6 billion. GlobalData estimates that 450,000 vehicles could be lost in a strike against all three automakers over thirty days and 1.4 million cars lost in a strike that lasted 100 days. This compares to the roughly 2 million vehicles currently sitting on U.S. dealer lots.