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Financial Market Update – Week of 08/14

August 15, 2023

U.S. stock indexes were mixed last week, courtesy of producer pricing data running a bit warm and bank credit downgrades in the spotlight. However, consumer pricing came in slightly lower than market expectations.

By last week’s close, here was the weekly tale of the tape: the S&P 500 retreated marginally by 0.31%, the Nasdaq 100 shed 1.62%, and the Dow Jones Industrial Average finished the week higher by 0.62%.

Moody’s Cuts Bank Credit Ratings

Moody’s, a “big three credit rating agency,” cut their ratings for several small- and mid-sized banks early last week. 

“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts said in the accompanying research note detailing the decision.

Moody’s also placed some larger banks under negative watches, meaning they’re being reviewed for potential downgrades.

The bank credit downgrades come after the previous week’s downgrade of the U.S. credit rating by Fitch Ratings.

July Inflation Data Mixed

Inflation data for July implied a mixed picture. Here’s the latest.

Consumer Price Index (CPI): July CPI rose less than expected, showing an uptick of 3.2% year-over-year versus 3.3% expectations. This was a good sign amid our continued inflation battle. However, the 3.2% annual number marked an increase from the 3.0% rise in June, which was the first such rise in 13 months–not so good.

Market reaction to the data was initially positive, but overall daily gains in major equity indexes were mostly given back by market close last Thursday.

Producer Price Index (PPI): After markets digested the mixed bag on CPI last Thursday, Friday’s Producer Price Index (PPI) was in focus.

The wholesale pricing metric rose 0.3% in July on a monthly basis, higher than the estimates of 0.2%. The rise was the biggest monthly gain since January and a jump from an unchanged reading in June.

The wholesale pricing data could be viewed as a precursor to higher consumer prices.

Treasury Yields Rise

While the consensus narrative in recent weeks seems to indicate lower interest rates, rising Treasury yields could be telling a different story in the last few weeks.

Yields for the 10-year note closed near their highs for the week last week and closed out the week near 4.167%, up from the prior weekly close near 4.061%.

2-year note yields also rose last week, closing the week near 4.899%, close to the psychologically important 5.0% level.

Putting It Together

The U.S. debt downgrade was already being digested by the markets when a new slew of bank downgrades added more focus to creditworthiness. 

Talk of rising consumer debt and weaker consumer spending could make it into more headlines soon, creating some headwinds for the market in the short term.

Market reaction was rather muted last week on the mixed inflation data and bank downgrades, but rising Treasury yields could be on the market’s radar this week and in the short term.

Ultimately, however, it is the long term that matters. Markets and sentiment can change quickly. That’s why it’s important to stay focused on the long-term strategy with discipline.

This week, attention will turn to retail sales as an indication of consumer health, along with the meeting minutes from the last Fed meeting.


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