U.S. equities stumbling into September
September 10th, 2024
RECAPPING LAST WEEK
U.S. equities stumbled into September, selling off sharply after mixed labor market data failed to provide the clarity investors sought on the economy and the path of interest rate policy. The Nasdaq Composite and Russell 2000 indices sank over 5.5%, while the S&P500 dropped more than 4%. Nine of eleven S&P500 sectors lost ground with technology and energy the biggest losers. OPEC delayed plans to hike production after crude oil prices tumbled 7.5% on weak economic data from the U.S. and China. U.S. Treasury yields fell steeply across the curve, with the two-year yield dipping below the 10-year for only the second time since 2022 as investors anticipated a potentially larger rate cut later this month.
The employment data painted a muddled picture of a labor market that is softening but not collapsing. Non-farm payrolls rose by 142k in August, but the prior two months were revised sharply lower. On the positive side, the unemployment rate ticked down to 4.2%, while wage growth was slightly above expectations. Data released earlier in the week revealed similar trends, with job openings falling to the lowest levels since 2021, layoffs increasing, and private payroll growth moderating. At week’s end, fed funds futures still indicated just a quarter-point rate cut at the September FOMC meeting. In other news, the August ISM manufacturing PMI came in below forecasts, with a large drop in new orders that sparked recession concerns. Services
activity remained in expansion territory, but the employment sub-index inched closer to contraction.
Overseas, China’s disappointing PMI numbers—released over the prior weekend—were one of the catalysts for the nosedive in risk assets. Chinese regulators were considering cutting interest rates on existing mortgages to prop up the beleaguered real estate market. The Bank of Canada reduced its benchmark rate by 25bps to 4.25% as expected, with more cuts likely this year. In Europe,
Germany’s manufacturing challenges came to a head as Volkswagen AG announced it may close several plants for the first time in its history. Last of all, the yen returned to the early August highs, boosted by a falling U.S. dollar and hawkish comments from Bank of Japan Governor Ueda. The move contributed to the overall uneasiness and heightened volatility in global markets.
THE WEEK AHEAD
U.S. investors will be focused on the latest inflation updates and the Presidential debate this week, while the main event on the international economic calendar is Thursday’s European Central Bank interest rate decision.
Last week’s U.S. jobs report likely reduced some of the importance in Wednesday’s CPI release, as concerns of a deteriorating labor market and elevated recession risks have moved to the forefront. While demand side economic indicators remain solid, lower-than-forecast inflation readings could signal that growth is slowing faster than previously thought and bolster the case for a 50bps rate cut, which would likely keep risk assets under pressure. As a point of conjecture, if the Fed eases and consumer demand stays firm, it sets up a potential disinflationary tailwind for the U.S. economy. Elsewhere, traders will be monitoring the demand for 10- and 30-year
Treasury debt at this week’s auctions.
The rest of the U.S. agenda includes consumer credit, small business sentiment, and the preliminary consumer sentiment and inflation expectation numbers for September. Overseas, the ECB is expected to cut its benchmark rate by a quarter point to 4%. Market pricing suggests two more rate cuts this year, although ECB President Lagarde may keep the bank’s intentions more guarded in her statement. The UK monthly employment update arrives Tuesday. Finally, it’s a busy week for China with inflation and trade balance figures to start the week, followed by industrial production and retail sales on Friday evening.
(source: Schwab)