Market Note – September 18, 2023

By Hightower Great Lakes on September 18, 2023

Economic Strength in Numbers

Atlanta Fed GDPNow predicts Q3 GDP will expand +4.9% q/q. August industrial production was above last year’s levels and expanded for the second-consecutive month, driven by durable goods – a significant component to GDP – and energy. Consensus expected the September Empire Manufacturing Index to contract, but it expanded.

Retail sales are experiencing a bounce-back from the early-summer slowdown, with broad strength. Initial claims remain pinned around 220,000 – far away from 350,000 recessionary levels. We are seeing recession predictions for 2023 being pushed out again as resilience has become embedded across the U.S. economy – driven by jobs, savings and spending. The S&P 500 is currently above strategists’ year-end consensus.

Better final demand and overall economic activity is leading to higher inflation, evidenced by CPI. CPI increased to +3.7% y/y in August, compared to +3.2% low in July. Energy-related prices and shelter-related service costs created upward pressure on inflation. We are paying close attention to labor negotiations and wage strikes happening across industries, as wage increases get passed down to consumers in the form of price.

Chart 1: Remaining Data-Dependent on Inflation, Still Above Fed’s Target 2%[1]

Home prices are still elevated. Homebuilder Lennar (LEN) underscored the strong housing demand in its Q3 earnings report. Home deliveries (+8% y/y) and new orders (+37% y/y) increased, while the average sales price ($488,000) ticked down slightly versus last year’s ($500,000). The average 30-year fixed mortgage rate increased to 7.18% last week – anchored above 7% amid economic strength and inflation.

Overall, the U.S. economy is doing better and that makes us feel good through the rest of the year. We are watching the impact from employee strikes and acknowledge that the restrictive Fed policy will continue to have lagged impacts.

Employee Strikes

Employers have held onto legacy wage contracts that lag inflationary prices, and unions are latching onto higher productivity, high job openings and higher inflation to negotiate preferred wages and benefits for their employees.

Writers, shippers, pilots, baristas, factory workers and employees in more industries are striking. Higher labor costs will push through in price. According to the Economic Policy Institute, the top 1% of works have seen wages rise 145% since 1979, while the average annual wages of the bottom 90% increased just 16%.[2]

The latest industry to strike is the United Auto Workers union, which is taking aim at its employers Ford, GM and Stellantis.[3] CEO compensation from these employers has grown more than 40% in the past four years.

UPS (UPS) recently negotiated new labor agreements and quickly announced a 5.9% shipping rate increase. American Airlines (AAL) approved new contracts that will raise pay more than 40% over four years and quickly cut profit forecasts, citing higher costs.[4]

When people make more money, they spend it. Consumer sentiment remains high, inventories are low – supporting business profits – and back-to-school shopping is a good indicator ahead of the holiday season. Walmart (WMT) raised its annual profit forecast and last week, its CEO Doug McMillon said, “things are better than I would have expected them to be when we started the year,” as potential headwinds from higher borrowing costs and student loans are being offset by saving yields and higher wages.

China Stimulus Working

China’s August activity data reported better than expected. Industrial production, services and retail sales all rebounded from July levels, beating expectations. Overall, China’s economic activity is still subdued and any conclusion for steady recovery is premature, but it is a sign that China’s incremental stimulus, which began in late July, is having its intended impact.

China’s weak property market maintains a challenging outlook. Outside of real estate, we are focused on an improving consumer and U.S. companies with exposure to China’s 900 million influential and loyal consumers.

Inflation and Economy Keeping Longer Yields Elevated

Hotter-than-expected headline CPI and PPI reports led to higher Treasury yields across the curve; the 10- and 30-year lead selloffs which decreased the 2/10 inversion finished to -71 bps. Market participants and the Fed continue to diverge in the rate path through the end of the year, with the Fed penciling in one more hike while market participants have priced in less than a 50% chance.

High yield spreads have continued to tighten, reaching new YTD lows last Thursday of +404 bps. Muni yields followed Treasuries higher across the curve on the week.

The Week Ahead

Earnings – Tuesday: AZO; Wednesday: FDX, GIS; Thursday: DRI.

Economics – Monday: NAHB Housing Market Index (September); Tuesday: Building Permits and Housing Starts (August); Wednesday: September FOMC Meeting; Thursday: Philadelphia Fed Index (September).

Return for Selected Indices^[5]

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Click here to read last week’s Market Note (9/11).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of September 17, 2023.

[2] Source: Economic Policy Institute. As of September 17, 2023.

[3] Source: CNN. As of September 17, 2023.

[4] Source: CNBC. As of September 13, 2023.

[5] Source: Bloomberg. As of September 17, 2023.