SUMMARY
The Labor Day holiday in the US marked the unofficial end of summer, and – for better or worse – also served as a demarcation point as far as risk sentiment. During a shortened four-day US trading week, the “feel good” recovery in equities that occurred in August was quickly forgotten as risk sentiment spiralled downhill the entire week. A series of weaker-than-expected economic data releases was a stark reminder that although a weakening US economy could spur faster and larger Fed rate cuts, the more profound effect might be on earnings growth. The US stock market sell-off splattered global equities which were also down across the board. US Treasuries rallied as investors sought safer ground. The 10-year US Treasury reached its lowest yield since June 2023, and the 2y-10y yield curve inversion was no more by the end of a volatile week for investors.
WHAT MATTERED LAST WEEK
August jobs report (and related jobs data)
The cherry on the cake as far as data releases last week was the US August payroll report that was published on Friday. Fewer jobs were added in August than expected (142,000 vs 161,000 expected), although there was a nice uptick from July. However, both June and July nonfarm jobs added were subsequently revised down, which seemed to annoy investors even though the unemployment rate for August actually fell to 4.2% (as expected). The BLS nonfarm payrolls report for August is here. Investors struggled initially to find direction in the mixed but largely-as-expected jobs report, although as Friday wore on, sentiment worsened and a sense of investor panic sat in.
Keep in mind that a weakening jobs market is the cost of tamping down inflation, which has been the Fed’s objective following two+ years of restrictive monetary policy. Bond investors are debating whether or not the latest data could lead to a jumbo (i.e. 50bps) reduction in the Fed Funds rate at the September FOMC meeting. The CME FedWatch Tool is still suggesting that the majority of investors only expect a 25bps reduction in the policy rate at the meeting in two weeks, although the total amount of reductions for the remainder of the year appears to have jumped to 125bps, meaning jumbo rate cuts could be in the cards for the November and December FOMC meetings.
The August payrolls report for August followed the release of the JOLTS data earlier in the week (Wednesday), which showed 7.7 million job openings at the end of July, or around 240,000 less than at the end of June. Although I find this data slightly dated, it nonetheless served as a reminder that the US jobs market is slowly weakening.
The realisation that the US economy is slowly weakening is clearly causing some investor panic, and also a fair amount of Fed finger-pointing with accusations that the Fed has left their official pivot towards easier monetary policy until too late. Time will tell on the latter point, although for those that think they can out-do the Fed, keep in mind that monetary policy actions – as we have vividly seen – are unpredictable in terms of both time (lag) and amplitude. Let’s be clear here – it is nothing more than good pundit sport to slap around the Fed, causing me to wonder time and time again why these well-educated economists and investors aren’t on the Fed themselves if they can predict the future so much better.
ISM data
ISM data for August in the US was similar to prior months’ reports in that manufacturing was weaker-than-expected and in contraction territory (Tuesday release), whilst ISM services was slightly better-than-expected albeit cooling (Thursday release). Again, both data reads confirm that the US is heading towards a soft landing, although I would reckon that some improvement in manufacturing once the Fed begins to ease would be encouraging.
Oil prices / OPEC+
It’s that old chestnut again – OPEC+ trying to influence the level of oil prices in the global marketplace by curtailing supply. The largest members of the cartel agreed to extend production cuts to November that were set to expire this month in an attempt to underline sagging global oil prices. As has been the case for nearly all of their recent decisions around supply, any short-term impact on prices quickly gives way to the twin economic reality of i) less global dependency on the cartel for global oil supply, and ii) potentially weakening demand as the global economy slows. WTI crude oil prices sagged in spite of the extension of OPEC+ production cuts, with the price/bbl down 8% WoW. WTI crude ended the week at $67.67/bbl, the first week oil has closed below $70/bbl since December 2023.
MARKET PERFORMANCE LAST WEEK
Global equity investors were in a sour mood most of the week, with all major indices suffering losses. It was perhaps inevitable given the unexpected recovery in equities from the early August sell-off, but it now begs the question: “where do we go from here?” US and Japanese stocks were the worst performers, eroding into their YtD gains. In fact, only the S&P 500 has registered (low) double-digit gains YtD, as deteriorating equity returns give way to better total returns in long-duration fixed-income investments.
As far as US stocks, tech shares continue to bear the brunt of the sell-off. In the third quarter so far, the large cap DJIA has delivered the best return (+3.1%), whilst the NASDAQ Composite has delivered the worst (-5.9%).
US Treasuries rallied last week with yields falling across the maturity curve. With the 2y reflecting policy expectations and the 10y reflecting economic outlook, it is pretty certain now that investors are in a mindset that the Fed will deliver a series of rate cuts, and the slowing US economy will lessen pressure on intermediate and long-term yields. The rally in USTs finally delivered to bond investors the bonanza for which they have now been waiting for more than two years. Should the economic trajectory continue as expected (and inflation remain contained), further gains might be ahead for bond investors.
In terms of credit, it would be premature to draw conclusions too quickly based on one week of data. However, as risk sentiment worsened, spreads on corporate bonds widened out with risky high yield debt paying the more severe price. We have seen these modest fluctuations in spreads on several occasions during the last couple of years, so it remains to be seen whether this round of spread widening is just another blip or if it is the start of a steady increase in credit spreads.
Gold spent much of the week above the important $2,500/oz threshold but weakened to close Friday as the safe haven ended flat WoW. The US Dollar weakened albeit only a touch, as the Yen continued to gain. Similar to other risk assets, Bitcoin got hammered last week.
WHAT’S AHEAD
Economic data this coming week in the States will be focused on August CPI (Weds) and PPI (Thurs), and Michigan consumer confidence on Friday. The CPI data will be the last piece of potentially influential data before the next FOMC meeting. We also get CPI data for China on Monday, and some employment and manufacturing data for the UK mid-week.
US presidential debate: The first and perhaps only Presidential debate (involving VP Kamala Harris and former president Donald Trump) will be on Tuesday starting at 9pm EST. It will be 90 minutes long and is sponsored by ABC. The microphones will only be on for the candidate answering the question. Keep in mind that no further debate between Harris and Trump is currently scheduled.
Apple: One company-specific news item to watch with be the Apple 2024 event on Sept 9 (Monday), in which Apple is expected to introduce the iPhone 16, as well as new / enhancements to the Apple watch and AirPods. They will almost certainly talk a fair amount about AI, too. The event starts on Monday at 10am PT / 1pm ET / 6pm BST, and you can access the event here (Apple website).
Upcoming monetary policy meetings remainder of 2024:
ECB: Sept 12 (expect +25bps), Oct 17 and Dec 12
FOMC: Sept 17/18 (expect +25bs), Nov 6/7 and Dec 17/18
Bank of Japan: Sept 19/20 (I reckon they will not tighten further at this meeting), Oct 30/31 and Dec 18/19
Bank of England: Sept 19 (leaning towards nil), Nov 7 and Dec 19
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