by Jack Fischer.
During LSEG Lipper’s fund-flows week that ended August 2, 2023, investors were overall net redeemers of fund assets (including both conventional funds and ETFs) for the first week in three, removing a net $389 million.
Money market funds (+$7.2 billion) observed weekly inflows, while tax-exempt bond funds (-$990 million), equity funds (-$1.9 billion), and taxable bond funds (-$4.6 billion) registered outflows on the week.
At the close of LSEG Lipper’s fund-flows week, U.S. broad-based equity indices reported negative returns—the Russell 2000 (-0.68%), Nasdaq (-1.09%), S&P 500 (-1.17%), and DJIA (-0.67%) were all in the red. This was the first week of losses in six for the S&P 500.
The Bloomberg Municipal Bond Total Return Index (-1.00%) recorded its first sub-zero return in three weeks. The Bloomberg U.S. Aggregate Bond Total Return Index (-1.19%) logged its second straight weekly loss.
Overseas indices traded mixed—the Nikkei 225 (-1.97%), FTSE 100 (-3.30%), and DAX (-1.92%) all traded negative. The Shanghai Composite was the only index in the black (+0.76%).
The 10-two Treasury yield spread has remained negative (-1.09) for more than one year. The 10- and 30-year Treasury yields rose significantly over the week (+5.50% and +5.82%, respectively).
According to Freddie Mac, the 30-year fixed-rate average (FRM) rose for the second consecutive week—currently at 6.90%. Both the United States Dollar Index (DXY, +1.69%) and VIX (+18.02%) rose over the course of the week.
The CME Fedwatch tool currently has the likelihood of the Federal Reserve increasing interest rates by 25 basis points (bps) at 17.5%. The next meeting is scheduled for September 20, 2023.
Our fund-flows week kicked off on Thursday, July 27, with markets digesting the prior day’s anticipated 25-bps rate hike from the Federal Reserve. The rate increase moved interest rates to the range of 5.25%-5.50%, marking a 22-year high. In his press conference, Fed Chair Jerome Powell said,
“The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.”
The Bureau of Economic Analysis reported that Q2 2023 real gross domestic product (GDP) increased at an annual rate of 2.4%, marking the fourth straight quarter of growth and a full percentage point higher than estimates. The report listed increases in consumer spending, nonresidential fixed investment, state/local government spending, private inventory investment and federal government spending as the main attributors to quarterly growth. Equity markets fell on the day—the Nasdaq (-0.55%), S&P 500 (-0.64%), DJIA (-0.67%), and Russell 2000 (-1.29%) were all down from the prior trading day. The 10-year Treasury yield rose 3.76% on the day, the largest daily increase since May 1, 2023.
On Friday, July 28, the Bureau of Economic Analysis published its Personal Income and Outlays June report which showed that both personal income and disposable personal income increased 0.3% in June. The personal consumption expenditures (PCE) index rose by 0.2%, with the core-PCE index also increasing by 0.2%. Core-PCE, which excludes food and energy, has increased by at least 0.3% for the last four months. The University of Michigan consumer Sentiment Index rose to 71.6, up from last month’s 64.4, indicating overall bullish consumer sentiment. Equity markets rebounded as Treasury yields fell—the Nasdaq (+1.90%) and Russell 2000 (+1.36%) were the leaders on the day.
On Monday, July 31, the Federal Reserve Board of Governors published its Senior Loan Officer Opinion Survey of Bank Lending Practices. This report showed that respondents highlighted both tighter standards and weaker demand for commercial and industrial (C&I) loans, as well as commercial real estate (CRE) loans. The Chicago Purchasing Managers’ Index (PMI), which highlights the health of the manufacturing sector in the Chicago region, came it at 42.8. Although higher than last month, (41.5) it indicated the eleventh straight month of economic contraction. Equity markets trades positive on the day—Russell 2000 (+1.09%), DJIA (+0.28%), Nasdaq (+0.21%), and S&P 500 (+0.15%) were all up.
On Tuesday, August 1, Fitch downgraded the United States long-term rating from AAA to AA+, matching what S&P Global Ratings did in 2011. Credit ratings agency Fitch put the U.S. sovereign status on watch negative back in May due to political dysfunction in Washington over the debt crisis. Fitch stated, “The repeated debt-limit political standoffs and last-minute resolution have eroded confidence in fiscal management…the government lacks medium-term fiscal framework, unlike most peers, and has a complex budgeting process.” In other news, the U.S. labor market may be cooling; job openings fell to 9.58 million in June, marking the lowest level in over two years according to the JOLTS report. The 10-year Treasury yield rose 2.23% while equity markets traded mixed on the day.
Our fund-flows week wrapped up Wednesday, August 2, with the Mortgage Bankers Association (MBA) reporting applications fell 3% over the last week of July. Application to refinance (-2.5%) and to buy a new home (-3.2%) both fell. ADP reported that the U.S. private employers added 324,000 jobs in July, with the main driver being within leisure and hospitality—manufacturing lost jobs for the fifth straight month. Equity markets fell on the day with the Nasdaq (-2.17%) realizing its worst daily loss since February 21, 2023.
Exchange-traded equity funds recorded $2.2 billion in weekly net inflows, marking the sixth straight weekly inflow. The macro-group posted a 1.33% loss on the week, its first loss in five weeks.
Growth/value-aggressive ETFs (+$2.6 billion), growth/value-large cap ETFs (+$747 million), and equity income ETFs (+$742 million) all took in money for the week. Growth/value-aggressive ETFs posted their fourth straight weekly inflow as they recorded their fourth largest weekly inflow on record—the largest since August 2008.
Sector-other ETFs (-$1.3 billion), growth/value-small cap ETFs (-$378 million), and sector-real estate ETFs (-$306 million) were the largest outflows under the macro-group. Sector-other ETFs suffered their first weekly outflow over the last three weeks as they realized negative weekly performance (-1.22%) for the first week in five.
Over the past fund-flows week, the top two equity ETF flow attractors were iShares: Core S&P Mid-Cap (IJH, +$2.3 billion) and iShares: Core S&P 500 (IVV, +$1.8 billion).
Meanwhile, the bottom two equity ETFs in terms of weekly outflows were Invesco QQQ Trust 1 (QQQ, -$3.0 billion) and JPMorgan: BetaBuilders Europe (BBEU, -$1.5 billion).
Exchange-traded taxable fixed income funds observed a $2.5 billion weekly outflow—the macro-group’s first weekly outflow in five. Fixed income ETFs reported a weekly return of negative 0.80% on average, their second consecutive week in the red.
Corporate-investment grade ETFs (-$1.2 billion), corporate-high yield ETFs (-$985 million), and government-Treasury ETFs (-$833 million) were the top taxable fixed income subgroups to post outflows over the week. Corporate-investment grade ETFs suffered their first weekly outflow in three weeks while posting back-to-back weeks of negative returns.
Flexible funds ETFs (+$387 million), international & global debt ETFs (+$205 million), and corporate-high quality ETFs (-$4 million) were the only taxable fixed income subgroups to witness inflows on the week. Flexible funds have attracted new capital in four of the last five weeks, despite seeing negative returns in five of the last six.
Municipal bond ETFs reported a $675 million outflow over the week, marking their first outflow over the past three weeks. The subgroup realized a negative 0.83%—also its first negative return in three weeks.
JPMorgan: USD Emerging Markets Sovereign Bond ETF (JPMB, +$300 million) and JPMorgan: Limited Duration Bond ETF (JPLD, +$286 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.
On the other hand, iShares: iBoxx $Investment Grade Corporates ETF (LQD, -$1.0 billion) and iShares: iBoxx $High Yield Corporates ETF (HYG, -$705 million) suffered the largest weekly outflows under all taxable fixed income ETFs.
Conventional equity funds (ex-ETFs) witnessed weekly outflows (-$4.1 billion) for the seventy-eighth straight week. Conventional equity funds posted a weekly return of negative 1.40%, the second consecutive week of losses.
Growth/value-large cap (-$2.3 billion), equity income funds (-$584 million), and growth/value-small cap funds (-$415 million) were the largest subgroup outflows under conventional equity funds. Growth/value-large cap funds have suffered 32 consecutive weeks of outflows while observing a 1.13% loss on average over the last week. The four-week net flow moving average has remained negative for 80 weeks.
International equity conventional funds (+$54 million) was the only subgroup to report weekly inflows, marking their first weekly inflow in 10 weeks.
Conventional taxable-fixed income funds realized a weekly outflow of $2.1 billion—marking their first weekly outflow in five weeks. The macro-group logged a negative 0.67% on average—marking back-to-back weeks of sub-zero returns.
Conventional flexible funds (-$911 million), corporate-investment grade funds (-$552 million), and international & global debt funds (-$326 million) reported the largest weekly outflows under taxable fixed income conventional funds. This was the third weekly outflow in the past four weeks for flexible income funds, despite realizing four weeks of gains in the last five.
Government-Treasury & mortgage funds (+$142 million) was the only taxable fixed income macro-group to produce inflows. This subgroup has attracted new capital in five straight weeks, even though they have suffered two straight weeks of negative performance.
Municipal bond conventional funds (ex-ETFs) returned a negative 0.74% over the fund-flows week—their third weekly loss in four. The subgroup experienced a $315 million outflow, marking the fifth weekly outflow in six.
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