US Economic Resilience Sparks Market Moves

US Economic Resilience. The financial world was abuzz with activity as the Dow Jones surged by 331 points on Thursday, with the S&P 500 and Nasdaq both registering gains of 0.8%. This impressive performance came on the back of robust economic data that highlighted the enduring strength of the US economy.

These positive indicators have given the Federal Reserve the breathing room it needs to maintain higher borrowing costs for an extended period. In this article, we will delve into the key factors driving these developments and their implications for various sectors, including stocks, bonds, mortgages, and currencies.

Retail Sales and Producer Prices

August brought pleasant surprises for the US economy, with retail sales rising by 0.6%, defying market expectations of a mere 0.2% increase. The driving force behind this surge was higher gasoline prices, which bolstered consumer spending. Simultaneously, producer prices soared by 0.7%, outperforming expectations of a 0.4% increase. This upward trend in inflation has significant ramifications for monetary policy and market sentiment.

Stock Market Performance

The stock market witnessed several notable movements. Arm shares skyrocketed by over 15% as the chip design company debuted on the Nasdaq with an IPO of $51 per share. Walt Disney also gained 1.2% following reports of preliminary talks about selling ABC to Nexstar Media Group Inc. In contrast, Netflix experienced a 2.8% decline, partially attributed to its CFO’s cautionary remarks regarding softer margins. Visa fell by 2.2% due to concerns over potential share sales by banks.

Bonds and Borrowing Costs

The yield on the 10-year US Treasury note inched closer to the 4.3% mark, nearing the 15-year high of 4.34% reached on August 22nd. This upward trajectory reflects growing confidence in the US economy’s resilience and strengthens expectations that the Federal Reserve will maintain restrictive borrowing costs. The unexpectedly high producer inflation in August, coupled with robust retail sales and low unemployment claims, solidified the belief that the Fed is unlikely to conclude its tightening cycle in the near term.

Mortgage Rates

For prospective homebuyers, mortgage rates remained elevated, with the average rate on a 30-year fixed mortgage standing at 7.18% as of September 13th, 2023. This represents a 6-basis-point increase from the previous week and approaches the 22-year high of 7.23% observed on August 23rd. The ongoing acceleration of inflation and a robust economy are the key factors behind these elevated rates. However, Freddie Mac’s Chief Economist, Sam Khater, emphasizes the potential for savings through rate shopping, suggesting that homebuyers can save $600-$1,200 annually by obtaining quotes from multiple lenders.

Business Inventories

In July 2023, total business inventories in the US remained flat month-over-month, following a slight decline in the previous month. The data showed variations among different sectors, with manufacturers and retailers seeing modest increases while merchant wholesalers experienced reduced inventories. On an annual basis, business inventories rose by 1.4% in July.

Oil Prices

WTI crude futures surged to $90 per barrel, the highest level since November of the previous year. This upward trajectory was fueled by expectations of a tightening global oil market. Major producers like Saudi Arabia and Russia continued supply cuts. Leading to a significant market deficit projected for the fourth quarter. However, US crude inventories defied expectations by rising unexpectedly.

Currency Markets

The British pound depreciated, reaching $1.24 in September, a four-month low. This decline was influenced by the dollar’s strength, driven by resilient US economic data. In contrast, concerning domestic data and a decreased demand for mortgages constrained the Bank of England’s hawkish stance. The UK’s GDP contracted by 0.5% in July, and job losses raised the unemployment rate to 4.3%, although average earnings continued to rise.

Conclusion

The US economy’s remarkable resilience is reshaping financial markets, from stocks to bonds, mortgages, and currencies. The positive economic data has bolstered confidence in the Federal Reserve’s commitment to maintaining higher borrowing costs. As these trends continue to unfold, investors and consumers alike will navigate a complex financial landscape with both challenges and opportunities on the horizon.