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Economic and Market Review for Week 19.05.2023

U.S. equities were higher this week, with the S&P 500 Index trading over the 4,200-level intraday for the first time since late August. The index has remained notably range-bound over the past few months. The index ended six consecutive weeks of changes of less than 1%. Sector performance was mixed, as cyclicals and growth groups led, and defensives and flight-to-safety groups lagged. The market advanced mainly due to the outperformance of several mega-cap technology-related stocks, particularly a strong gain in the shares of Google parent Alphabet and Facebook parent Meta Platforms. NVIDIA, Advanced Micro Devices (AMD), and several other chipmakers also recorded solid gains. Regional bank shares also rallied and regaining some of their recent losses, with a regional bank exchange-traded fund (ETF) recording its best daily gain since early 2021 on Wednesday, according to data. A positive tone was structed when President Joe Biden stated he was confident there will be no default, while Republican House Speaker Kevin McCarthy called a deal “doable” and Democratic Senate Leader Chuck Schumer stated that the only path forward was via a bipartisan deal.

Investors are closely watching U.S. government debt ceiling negotiations in Washington, the yield of the 10-year U.S. Treasury bond rose to the highest level in more than two months. The bond was trading around 3.69% on Friday—up from a recent low of 3.29% on April 6. Treasuries had a large sell-off across the curve, with the two-year yield back around 4.3%, the highest level since mid-March. The dollar index ended the week higher.

Week’s economic data were generally in line with consensus expectations. April’s retail sales report shows that consumers spending remains healthy, though they’re becoming more selective in their purchases. Retail sales increased by 0.4% month over month in April, after falling by 0.7% the prior month. The headline rise in retail sales was helped by a 0.4% month over month increase in spending on motor vehicle sales. According to analysts’ estimates real consumption growth will likely slow significantly in the second quarter as high rates and tight lending standards weigh on consumer spending. Unemployment claims declined in the past week. Initial jobless claims fell to 242,000 in the week ending on May 13. This signals that labor market conditions remain tight and need to moderate significantly in the upcoming weeks for the Federal Reserve to pause rate hikes at its June meeting. Economists predict that jobless claims will resume their upward trajectory as the economy slows and enters a mild recession this year and as layoffs become more widespread. The housing market continues to weaken as rate-sensitive sectors come under greater stress. Existing home sales fell by 3.4% in April month over month to 4,280,000, declining for the second straight month. Home sales fell, as home prices increased by 3.6% month over month and declined by 1.7% year over year, the biggest price declines were in the South and the West.

According to officials the U.S. Treasury General Account, which is its cash-operating account, is declining more quickly than the government expected, because of weaker tax revenues. Speaker Kevin McCarthy is aiming for President Joe Biden to pass a debt ceiling increase law by June 1. To meet that deadline, house needs to agree in the next few days so that the legislation could be drafted and voted on by Congress, then signed into law by Biden. We believe that long-term investors should ignore the noise and remain committed to their financial plan. In addition to the latest negotiations over the U.S. government debt ceiling, many investors will be looking to Wednesday’s release of the Federal Reserve’s May 3rd policy meeting minutes. The next meeting decision is June 14th.

Shares in Europe advanced amid optimism that interest rates could be close to peaking and that the U.S. would avoid a debt default. In euro terms, the pan-European STOXX Europe 600 Index ended the week 0.72% higher. Among major markets, Germany’s DAX climbed 2.27%, while France’s CAC 40 Index gained 1.04%. European government bond yields increased due to growing confidence in the European economy and a possible positive result in U.S. debt ceiling negotiations. The yield on the 10-year German bond rose toward 2.5%, its highest level in more than three weeks. The European Commission raised its forecasts for eurozone economic growth this year and next and predicted inflation would remain stubbornly high. The latest projection calls for gross domestic product (GDP) to expand 1.1% this year and 1.6% in 2024, up from the previous forecast for growth of 0.9% and 1.5%, respectively.

Japan’s stock markets registered their sixth consecutive weekly gain, with the Nikkei 225 Index rising 4.8% and the broader TOPIX Index up 3.1%. Both indexes are close to 33-year highs, boosted by solid domestic earnings, yen weakness, and strong overseas buying of Japanese equities. Japan’s gross domestic product expanded at an annualized rate of 1.6% in the first quarter of the year, ahead of expectations. Japan’s April core consumer price index rose 3.4% year on year, because of hikes in food prices. Despite increased consumer inflation, Bank of Japan is committed to maintain loose monetary policy.

Volatility will remain elevated in equity and bond markets until there’s a meaningful decrease in inflation. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure and Developed International equities. For fixed income, we remain defensive in our credit positioning and higher in credit quality.

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