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Economic & Market Insights

For the week of October 3, 2022

Macro update

Incoming economic data points for August and September continue to paint the picture of decelerating growth for the U.S. economy. Stiff inflation headwinds and rising interest rates have taken a lot of steam out of consumer spending momentum since the beginning of the year. Even so, underlying trends have remained slightly positive as consumers have dipped into excess savings accumulated during the earlier stages of the pandemic to fuel recent purchases. As these savings deplete, a key question is whether enough relief is forthcoming on inflation to allow the wage gains over the past year to propel spending in the coming quarters. Nearer term, we estimate that 3Q GDP rose approximately 2%, helped in part by the narrowing trade deficit and inventory building.

Consumer confidence rose more than expected in September, going from 103.6 in August to 108.0, its highest reading since January, with assessments of both current and expected future conditions improved. Consumers’ views of the labor markets reflect the still-favorable environment with plentiful jobs. Notably, a near-record 18% of respondents intend to take a foreign vacation in the next six months (the stronger U.S. dollar is likely a driver of this, along with pent-up demand after pandemic-related restrictions). 

After a half year of generally declining home sales, home prices are starting to roll over. According to reports, house prices slipped about 0.5% in July, the first month-to-month decline since early 2012. It looks like some of the West Coast post-pandemic highflyers are getting hit the most: Seattle was down 2.5%, and San Francisco was down 3.6%. New York City was flat, while Miami was up 1.4%. 

The August Personal Consumption Expenditures price data showed inflation trends continuing to run significantly above the Federal Reserve's 2% target for this metric. The PCE core index was up 0.6% in August and increased 4.9% year over year (up from 4.7% year over year in July).

August was a soft month for real consumer spending growth, with a 0.1% uptick reported for the month. Though the recent trend has been softer than earlier in the year, we still think that real consumer spending is on track for a modest quarterly gain in 3Q of about 1% seasonally adjusted annual rate. Price increases have been cutting into income gains lately, and real personal income was down 2.3% year over year in August (real disposable income fell 4.5% year over year). 

Source: U.S. Census Bureau, Bureau of Economic Analysis, Conference Board.
Macro Current Prior
Durable goods orders -0.2% -0.1%
Consumer confidence 108.0 103.6
Core PCE year over year 4.9% 4.7%
Real consumer spending  0.1% -0.1%

 

Markets update

Last week capped off a rough-and-tumble month for risky assets. Volatility jumped as investors shed stocks and bonds. With inflation still running hot and ongoing strength in the labor markets, markets are increasingly worried of a Fed overshoot: hiking rates so far it tips the economy into recession. 

Equities hit a fresh year-to-date low, with the S&P down 25% and the Nasdaq down 32%. 

Extreme volatility in U.K. gilt yields last week led the Bank of England to intervene with temporary asset purchases as a financial stability measure. This action also bolstered the British pound, which was trading as low as $1.07 early last week before rebounding to $1.12. The pound has depreciated 17% versus the U.S. dollar since the beginning of the year.

High-yield bond spreads widened the most since early July, contributing to a stall in capital markets issuance and decompression among ratings. While yields are now well above the previous high in June, HY spreads remain 52bp below the early July wide of 637bp.

Meanwhile, high-grade bond spreads reached a new wide for the cycle this week at roughly 190bp on the back of stress in the U.K. pension market and a jump in U.S. rates’ volatility. The move higher in spreads and yields is pushing down bond prices, and HG bond returns are down 18% year to date. HG bond yields at 5.7% are at a 13-year peak.

Source: Bloomberg. Closing prices on Sept. 30, 2022.
Markets 9/30/2022 △ W/W △M/M △Y/Y
S&P 500 3,586 (2.9)% (9.3)% (16.7)%
Nasdaq 10,576 (2.7)% (10.5)% (26.8)%
VIX 32.32 8.0% 24.9% 39.7%
WTI ($/bbl) $79.70 1.2% (11.0)% 6.2%
Brent ($/bbl) $87.96 2.1% (8.8)% 12.0%
Natural Gas ($/mmBtu) $6.79 (0.6)% (25.6)% 15.7%
Gold ($/oz) $1,662 1.1% (2.9)% (5.4)%
U.S. IG Yield 5.81% 27bp 80bp 307bp
U.S. HY YTW 9.89% 44bp 119bp 538bp
USD Spot Index 1,337 (0.2)% 3.2% 14.8%
Bitcoin B19,495 3.4% (3.5)% (55.1)%

 

Treasuries also experienced significant moves over the past week and month. Yields are at 15-year highs for the 2-year treasury and 13-year highs for the 10-year.

Source: Bloomberg. Closing prices on Sept. 30, 2022.
Rates Monitor 9/30/2022 △ W/W △M/M △Y/Y
Fed Funds  3.00-3.25% 0bp 75bp 300bp
1M CME SOFR 3.04% 1bp 52bp 298bp
1M LIBOR 3.14% 6bp 59bp 306bp
2yr U.S. Treasury 4.26% 6bp 77bp 398bp
10yr U.S. Treasury 3.82% 14bp 63bp 234bp
30yr fixed rate mortgage 6.83% 24bp 88bp 365bp

 

Issuance / M&A volumes

While September brought the first >$1 billion IPO since January and about 10% of the leveraged credit issuance pipeline of $90 billion was placed, capital markets activity was quite muted overall amid significant market volatility and a pullback in investor risk appetite. A proposed high-yield issuance was pulled from the market last week. 

In leveraged credit, the third quarter’s $23 billion of loan issuance is the lowest since 1Q10. Meanwhile, a 500-plus basis point year-to-date rise in HY yields (or +2x) is translating into the lightest annual HY bond issuance volume since 2008. And on a quarterly basis, third quarter HY supply totaling $19 billion is the lowest since 1Q09.

Source: Bloomberg.
Note: All issuance and M&A figures for North America. As of September 2022. To be updated monthly.
Volumes ($ billions) 2022 YTD 2021 YTD % Change FY2021
IPO $6 $113 -95% $152 
SPACs $12 $123 -90% $162 
Venture Capital $181 $251 -28% $330 
Investment Grade $1,016 $941 8% $1,380 
High Yield $90 $400 -77% $484 
Leveraged Loans $204 $300 -68% $835 
M&A $1,345 $1,850 -27% $2,678 

 

Chart of the week

Moderating slide in consumer confidence and sentiment

Source: Conference Board, University of Michigan. 

 

J.P. Morgan content & research highlights

· Oil Weekly: Re-testing $100 in 4Q22; Kaneva

 

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Meet Ginger

Ginger Chambless is Head of Research for Commercial Banking. In this role, she produces curated thought leadership content for CB clients and internal teams. Her content focuses on economic and market insights, industry trends and the capital markets. Connect on LinkedIn.

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