Weekly Market Vibes

Stocks break winning streak

The major benchmarks closed lower in a holiday-shortened trading week. The Nasdaq Composite suffered its first weekly decline in two months, while the S&P 500 Index recorded its first drop in six weeks. Growth stocks outperformed value shares, while large-caps fared better than small-caps. The annual rebalance of the Russell indexes on Friday appeared to keep volumes muted earlier in the week, as some investors prepared to shift the allocations of their portfolios in response. Markets were shuttered on Monday in observance of the Juneteenth holiday.

Signs that further Federal Reserve rate hikes lay ahead seemed to weigh on sentiment for much of the week. In prepared testimony before Congress on Wednesday and Thursday, Fed Chair Jerome Powell stated that “nearly all [policymakers] expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” Indeed, the Fed’s latest Summary of Economic Predictions revealed that a majority of those on the policy committee expect at least two more quarter-point rate hikes in the coming year—although futures markets continued to predict that was unlikely. News on Thursday that the Bank of England and Norges Bank, Norway’s central bank, had accelerated their pace of rate hikes also seemed to intensify rate fears.

Manufacturing output falls as suppliers slash prices

Much of the week’s economic data seemed to deepen worries that tight monetary policy was pushing the U.S. into recession. On Friday, S&P Global reported that its gauge of U.S. manufacturing activity had fallen back to its lowest level since December and well below consensus estimates. The report also showed that suppliers were cutting prices at the fastest pace since the heart of the pandemic lockdown in May 2020, presumably in response to weak demand.

Although Fed Chair Powell insisted to Congress that the labor market remained tight, weekly jobless claims hit 264,000, matching the previous week’s upwardly revised number, the highest level since October 2021. The housing sector showed some surprising strength, however, with housing starts coming in at their highest level in over a year and well above forecasts. Sales of existing homes also surprised modestly on the upside.

FDIC continues to unload munis acquired from distressed banks

Longer-term U.S. Treasury yields ended roughly unchanged and traded in a narrow band over the week. Municipal bonds outperformed over much of the week, helped by strong demand for higher-yielding new issues. Sales from the Federal Deposit Insurance Corporation (FDIC) of recently acquired assets from distressed banks were also strongly bid.

The investment-grade and high yield corporate bond markets were relatively subdued over the holiday-shortened trading week. The bank loan market was also calm, but portfolio managers of collateralized loan obligations were a source of demand in the secondary market.

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