Baker Market Update
2023-08-04

This week, America’s FICO score took a hit and both stocks and bonds were not thrilled with the news. On Tuesday, Fitch Ratings (one of three major credit raters with S&P and Moody’s) downgraded Uncle Sam to AA+ from pristine AAA which hasn’t happened in over a decade when S&P did it in 2011. The rating agency cited long-term fiscal imbalances, rising debt cost and the politically driven debt-ceiling situation as reasons for the downgrade. US Treasury Secretary Janet Yellen was quick to chime in and say the decision was “entirely unwarranted.” JP Morgan CEO Jamie Dimon said the downgrade was “ridiculous.” While most headlines coming out in wake of the news are citing this should not be a significant market moving event, others are concerned that this could question the soft-landing narrative that has recently been reinforced with a solid Q2 GDP (2.4%) print last week as well as recent progress on the disinflation front (Core PCE down to 4.1% YOY).

Looking at the markets this morning, we are seeing a rebound in bond prices on Friday after a sell-off throughout the week. The long bond (30Yr) drifted up 30 basis points at one point during the week from 4% and is giving a little back today, back down to 4.26% currently. The 10 year was up over 20 bps from 3.96% to 4.18% and has since dropped back to 4.11% this morning. The 2-year bond which more closely tracts Fed policy was largely unchanged at 4.9% but until Friday as slipped down below 4.8% indicating maybe peak rates could be now or very near. The yield curve steepened this week as 10s vs 2s moved from -90bps to -70bps. All three major stock indices are set to finish the week in the red after the rally late last week.

This week marks the first of eight until the next Federal Open Market Committee (FOMC) meeting which is the longest amount of time between meetings. This means a lot of economic data will be released including two inflation and jobs reports each for the committee to digest before September’s meeting. Looking at this week’s data, most of it came in as expected. Monday gave us the Senior Loan Officer Opinion Survey (SLOOS) which shows US banks going through tighter credit standards and weaker loan demand. On Tuesday, JOLTS (Job Opening and Labor Turnover Survey) was released and the most popular metric from JOLTS, the job number of job openings, dropped to 9.6 million which was in line with economist expectations and further shows a cooling in the labor market. The Institute of Supply Chain Management (ISM) released both their Services and Manufacturing Surveys, these both were relatively flat versus prior readings (52.7 and 46.4).

Now let’s turn to the big number today which is the jobs report for July. US employers added 187,000 nonfarm payrolls and the unemployment rate fell to 3.5%. The initial readings from the release adds little clarity to the Fed outlook as it was considered a mixed bag of data points. While the unemployment rate dropped, this was also the second month of weaker than expected growth and job gains sub 200k. Also, the two-month net-payroll revision was lowered by 49k and wage growth came in a little higher than expected a 4.4% YoY. After the release, the Atlanta Fed President Raphael Bostic acknowledged the current restrictive stance on rates and that this report confirms continuing slowing of the economy to tame inflation.

Next week the markets will focus back on the inflation story as July CPI and PPI releases later in the week. And on Friday we’ll get a look at the University of Michigan Consumer Sentiment Survey.

10yr/2yr Yield Curve Inversion– The UST Yield Curve continues to flash warnings of a slowdown in growth as it has now been inverted for 55 consecutive weeks. This ranks third going back around 50 years. Economist cite very strong track record of a yield curve inversion preceding a recession however the timing is often uncertain as we have seen this year.

Consecutive Weeks of 10yr/2yr Yield Inversion

Here are some interesting articles from the week.
America’s Fiscal Time Bomb Ticks Even Louder (WSJ)
The great Rolex recession is here: How the Fed crushed the luxury-watch boom (BUSINESS INSIDER)
Rent is finally cooling. See how much prices have changed in your area. (WASH POST)
While Everyone Else Fights Inflation, China Deflation Fears Deepen (WSJ)
Everyday Investors Are Thriving in a World Awash in Yield (WSJ)
Kansas City Fed names next president (Banking Dive)