Week ended Sept 22, 2023: Central bank trifecta, recent IPOs
WHAT HAPPENED THIS WEEK THAT MATTERED?
I am riding out to the English countryside this afternoon as I pen this weekly update and am wondering what to say inspiring, especially since the week more or less unfolded as expected as far as the trifecta of central bank decisions in the US, the UK and Japan. Perhaps the only slight surprise was the decision by the Bank of England, which – in a 5-4 vote amongst Monetary Policy committee members – decided to pause its nearly two-year string of 11 consecutive interest increases in the Bank Rate. This wasn’t really shocking in that market pundits said the likelihood of a rate increase was 50/50 anyway. Perhaps the lower-than-expected August CPI read in the UK the day before the monetary policy decision sealed it.
I provide more detail on the central bank decisions and relevant links further below, but the aftermath as far as markets can be summarised as follows:
US investors seem to better understand “higher for longer”, which – post decision and Powell press conference – pushed US Treasury yields higher and US stocks into a funk.
Sterling fell and UK stocks sold off as the BoE paused its series of rate increases dating back to December 2021. Normally, I would expect risk assets to rally into this dovish tilt, but it seemed just one more nail in the coffin for UK growth which continues to be anaemic and is heading lower. Having said that, I do wonder more and more if Brits’ tendencies to err towards the more depressing end of the spectrum in general mean things might not be quite as bad as the press portrays. I will need to see it (i.e. growth) before I believe it.
The Yen got hammered and Japanese equities declined all week in anticipation of a “nothing” decision from the BoJ, and that is exactly what we got. Arguably, the BoJ even pushed out investor expectations of when they might “normalise” monetary policy, whatever that might mean these days.
The Fed’s confidence in the trajectory of the US economy, clear in its revised Economic Projections released after the FOMC meeting, was validated – at least for the time being – by weekly jobless claims on Thursday (here), which were far lower than expected. Indeed, the US jobs market remains so resilient that I am not sure even the Fed understands why it remains so firm in light of the hawkish monetary policy.
Recent IPOs: ARM, Instacart and Klaviyo
The downdraft in equities this week took some shine off the recent IPOs of ARM, Instacart and Klaviyo. However, in spite of the NASDAQ Composite declining 3.6% WoW, all three new IPOs remain at or above their IPO price for now, although well below their intra-day highs post-IPO.
This table clearly shows the dirty secret that investors which were allocated shares on the IPO and flipped them quickly made a killing, whilst long-term investors are at least are holding onto meagre gains for the time being. The fact is all three IPOs were (and remain) richly valued, even if the IPO prices essentially were a “down round” for the last round of (private) VC investors.
Back to the central bank decisions
As mentioned above, the trifecta of central bank monetary policy decisions this week has been covered ad nauseum in the mainstream financial press, so there’s no need for me to spend much time regurgitating what you most certainly have already read by now. Here’s the brief summary and relevant links should you care to dig deeper:
Federal Reserve (Sept 20) ––> “hawkish pause” as expected. FOMC press release here, published revised Summary of Economic Projections here, J Powell’s post-decision comments and Q&A from the Federal Reserve website are here
Bank of England (Sept 21) ––> pause with 5-4 vote (consensus was 50/50, “on the fence”), after 11 consecutive increases dating to Dec 2021; Monetary Policy Statement and Minutes of Monetary Policy Committee meeting here
Bank of Japan (Sept 22) ––> did nothing as expected, in line with history; press release from BoJ here. The BoJ was clear that they do not believe that Japan is near its inflation target, with headline and core CPI in August of 3.2% and 3.1%, respectively, both representing slowing inflation vis-à-vis prior reads.
What bothers me
The US jobs market remains so resilient that it seems difficult for the Federal Reserve to explain. The revised Economic Projections (summary here) released following the most recent FOMC meeting adjusted the year-end unemployment rate down to 3.8% and the 2024 level down to 4.1%, well below the June projection for 2024 of 4.5%. GDP growth was revised to 2.1% for this year (versus 1.0% in June), and 1.5% in 2024 (versus 1.1% in June).
As I wrote earlier this week in an article in EMC (here), I am struggling to reconcile what the economic data shows and what people seem to feel. Most folks seem increasingly anxious about the future. Often when the narrative shifts to complacency (meaning solid US data), the proverbial shit hits the fan. I must admit that I like the soft-landing idea a lot although I’m not sure that I buy completely into it because of the risks inherent in the global economy, little of which is reflected by backwards-looking economic data. For the world’s largest economy, these are things worth considering:
Potential US government shutdown as the budget discussions go nowhere fast,
Higher oil prices as a more organised OPEC+ shows solidarity and commitment in keeping oil above $90/bbl,
Resumption of student loan debt payments,
Ongoing UAW strike,
Higher interest rates, recognising the lags that occur for higher interest rates to bite, and
Declining stock of US personal savings.
This cocktail of concerns is grating on me, causing me to believe that equities will remain under severe pressure and – in spite of yields heading higher this week – bonds will rally. I expect corporate credit spreads to widen from their ridiculously tight levels as concerns about the future grow. Time will tell whether I’m right or just a grumpy old geezer.
MARKETS THIS WEEK
Overall it was a lousy week for stock and bond investors globally, but a better week for those playing the US Dollar which continues to edge higher.
The FOMC decision sparked a strong sell-off in US equities on Wednesday afternoon, which carried into the remainder of the week. UST yields rose and the USD strengthened, as the Fed left the door open to one more rate hike at the November FOMC meeting. The “higher for longer” theme was supported by the release of first time jobless claims on Thursday morning, which came in sharply lower than anticipated. The cocktail of the Fed’s hawkish pause and the better-than-expected jobless claims reminded investors forcefully of the ongoing resiliency of the US jobs market and the strength of the US economy.
The Bank of England decision was probably not certain until the August CPI report was released the day before (here), which showed that inflation slowed more than expected in August in the UK. Rather than invigorate equity investors, the BoE decision to hold the Bank Rate at its current level instead reminded investors of the precarious state of the UK economy, which is facing severe headwinds as far as growth. Sterling declined against the USD, continuing its decline since mid-July.
You can find the weekly performance of select indices and other asset classes in the section “The Tables” further below.
THINGS TO WATCH
Things to watch:
UAW strike in the US: volatile situation
Student loans are out of forbearance with payments starting again in early October
Carryover themes: Higher oil prices, firm US Dollar, China growth
US: PCE (Fed’s preferred inflation measure) to be released Fri, Sept 29h; housing data throughout week; Michigan Consumer Confidence survey on Fri, Sept 29th; Aug durable good orders
Europe: consumer confidence data and preliminary CPI data for Sept (Fri, Sept 29th)
Upcoming central bank meetings are as follows:
· ECB: Oct 26 and Dec 14
· Federal Reserve (FOMC): Oct 31/Nov 1; Dec 12-13
· Bank of Japan: Oct 30-31 and Dec 18-19
· Bank of England: Nov 2 and Dec 14
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets