HIGHLIGHTS:
Healthy economic data pushed rates higher and stocks lower.
Employment and manufacturing data showed a strong finish to the third quarter.
The Week Ahead: Third quarter earnings season begins, and analysts expect another 20+% gain.
Healthy economic data pushed rates higher and stocks lower.
Strong economic reports helped push bond yields above their recent trading range to the highest level since 2011. The higher yields reflected renewed fears that the Federal Reserve might raise rates faster than anticipated. This, in turn, helped push down stock prices. The S&P 500 fell -0.95% after hitting a record high the previous week. Only four of the sectors, energy, financials, utilities and industrials, posted gains, while consumer discretionary stocks led the decliners. Small cap, international and emerging market stocks all fell more than the S&P 500.
Via Nova’s most likely scenario calls for higher interest rates, so the yield surge was not a surprise, and it is unlikely to derail the current bull market in stocks. However, it is important to note that Interest rates, like stock prices, seldom move steadily higher or lower. Instead, yields and prices often move in surges and waves, as we witnessed in the latest week. The increase in the 10-year Treasury yield to a seven-year high helped drop the Bloomberg Barclays Aggregate Bond Index by -0.99%, bringing the index down -2.66% year to date.
In other markets, the dollar rose 0.60% on the stronger economic reports. Oil and gold prices also increased, while real estate stocks fell.
Employment and manufacturing data showed a strong finish to the third quarter.
Two key economic reports are typically released in the first week of the month; the ISM Manufacturing Survey and the Employment Situation. These two releases usually set the tone for subsequent reports later in the month. Both were solid. The ISM index hovered near a cyclically high 60 in September, indicating a healthy manufacturing sector. The employment report showed a weaker than expected 134,000 increase in jobs last month, but previous months’ gains were revised 87,000 higher, more than offsetting the headline miss. Moreover, the unemployment rate fell to 3.7% from 3.9%, the lowest level since 1969. Wage pressures, as measured by average hourly earnings, continued to build. Based on the updated available data, the Atlanta Fed’s GDPNow model estimates third quarter real GDP growth at 4.1%, nearly double the pace so far in this expansion.
The Week Ahead: Third quarter earnings season begins, and analysts expect another 20+% gain.
While there will be updates on inflation and business confidence, the beginning of third quarter earnings season will likely be the central focus for the markets.Third quarter earnings are expected to increase 21.5% from the prior year, and revenue is forecasted to rise 7.4%.Both are strong but softer than second quarter gains.