Mixed economic data and comments from the Fed send stocks lower
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Sept. 21, 2020
Last week the S&P 500® index fell for the third straight week. The decline was a modest 0.6 percent, but it left the index 7.3 percent below its early September peak. The Nasdaq Composite also fell for the third straight week, by a similar 0.6 percent, leaving it in correction territory, down 10.5 percent from its recent peak. Both averages suffered the bulk of their declines following the Fed meeting on Wednesday.
Despite an unequivocally dovish stance by the Fed regarding interest rate policy, investors were disappointed that there was not a commensurately dovish posture regarding quantitative easing. Despite protestations from the chairman that the Fed retains full flexibility to increase its balance sheet as necessary, that the Fed did not increase its pace of bond purchases was viewed by some as inconsistent with its indication that rates are likely to remain at 0.0-0.25 percent through 2023. Chairman Powell also averred that the Fed’s new 2020 GDP forecast of -3.7 percent, updated from its June forecast of -6.5 percent, includes an assumption that another round of fiscal support will be forthcoming, which is no certainty. Powell will have an opportunity to expand upon the Fed’s position when he testifies before Congress this week.
Also weighing on equities was a mixed week for economic data. Industrial production, retail sales, and weekly jobless claims softened somewhat, while homebuilder and consumer sentiment rose more than expected. Housing starts fell, but most of the weakness was in multi-family. Single family starts were strong.
Moves elsewhere were mostly muted. The yield on the ten-year note edged higher by two basis points to end the week at 0.69 percent but was unchanged after the Fed meeting. High yield credit spreads edged slightly lower but are virtually unchanged since the end of July. The dollar also edged lower, as did the VIX. Commodities were a notable exception, as the Bloomberg Commodity index climbed 2.0 percent on the week. WTI crude jumped $3.78, or 10 percent, to $41. 11 a barrel as Saudi Arabia reaffirmed its commitment to production discipline. Copper rose 2.6 percent. And soybeans climbed 6.0 percent on record buying by China.
Stocks overseas performing slightly better than the U.S.
While domestic equity averages have slumped over the past three weeks, overseas stocks have fared somewhat better. The MSCI All-Country Ex-U.S. index is lower by just 0.6 percent in dollar terms, compared to the 7.3 percent decline in the S&P 500. And international stocks are higher by 1.6 percent over the past two weeks, compared to the 3.1 percent loss in the S&P, which is mostly attributable to the 5.4 percent two week decline in the technology sector with a 29 percent index weight. And the overseas gains are dispersed between the Eurozone, UK, and Asia Pacific regions. Stocks in Latin America are the notable exception, down 2.0 percent.
Overseas weakness as the new trading week gets underway threatens to undo this outperformance, however. Stocks in Asia were lower across the board on Monday and that weakness has spilled into Europe with even greater intensity. The EuroStoxx 50 index is lower by 3.0 in midday trading on concerns about rising virus infections and political uncertainty. Futures in the U.S. are pointing to a sharply lower open as well. The dollar is stronger and commodity prices are lower.
In addition to Fed Chairman Powell’s Congressional testimony this week, the economic calendar includes a look at new and existing home sales, durable goods orders, and flash PMIs. Flash PMIs are also scheduled for other major global economies.
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