Stocks were generally positive this week as investors are balancing the benefits of a Fed Rate cut or rate cuts against a weakening labor market as they position their portfolios heading into the Autumn (We never use the word Fall. Bad karma!). Historically, markets tend to respond favorably when the Fed is cutting as a preventive measure rather than staving off a looming recession. We believe this is the former rather than the latter.
Fixed income rallied sharply as the prospect of rate cuts increased after the release of the jobs report. The direction of the stock market may ultimately be determined by whether the pile of cash investors are sitting on becomes deployed in the bond market or added to their equity positions. Time will tell.
- This coming week’s inflation data, to be released on Wednesday and Thursday and as measured by the Producer and Consumer Price Indexes, should be the last pertinent piece of economic information that will impact the Fed’s decision on whether or not to reduce interest rates at their next scheduled meeting, September 17-18. The consensus is for both inflation gauges to have risen by 0.3% during the August reporting period. If the data comes in line or better than expected, we would anticipate the Fed announcing a 0.25% cut at the conclusion of this meeting and set the stage for one more cut at their following meeting which is scheduled for November 6-7.
- According to Mortgage News Daily, the average rate on a 30-year fixed mortgage fell 16 basis points (0.16%) to 6.29% on Friday following the release of the August Payroll Report (see below). According to Mortgage News Daily Chief Operating Officer Matthew Graham, the move in interest rates is a “good reminder that the market gets to decide what matters in terms of economic data, and the bond market has a clear voting record that suggests the jobs report is always the biggest potential source of volatility for rates.”
- According to the Bureau of Labor Statistics, consumer spending for retirees above the age of seventy-five is $53,031 per year or 19% below the $65,149 retirees spend from age 65 to 74. Serious food for thought when considering a projected inflation rate during these years. (Sources, Bureau of Labor Statistics; Corebridge)
- September can be tough as “over the last 25 years, September ranks as the S&P 500’s weakest month with an average decline of 1.5% and gains just 45% of the time. Over the last 50 years and since 1928, September also ranks as the weakest month with average declines of 0.88% and 1.17%, respectively.” Well, at least we’ve got one week behind us with modest gains. Although not actionable, this potential volatility is something that investors should prepare for mentally. (Source and Quote; Bespoke)
It’s The Economy…”
- Non-Farm Payrolls(approximately 80% of the U.S. workforce) rose by 22,000 during August, below the consensus estimate of 83,000. Payroll numbers for the prior two months were revised to 79,000 and -13,000, from 73,000 and 14,000for a net loss of 21,000. The rolling three-month average rose to 29,300 from 28,300 but has fallen from 231,700 in January. Private Sectorcompanies added 38,000 jobs while the Public Sectorfell by 16,000. This includes a 15,000 drop in federal government employment during August (-3.2% y/y) and 97,000 year-to-date. The Unemployment Rateticked up to 4.3% during August from 4.2% in July. The Unemployment Rate had gotten as low as 3.4% in April 2023. (Source, U.S. Department of Labor)
- The Institute for Supply Management’s composite index of non-manufacturing (service) sector activityrose to 52.0% during August from 50.1% in July. Of note were New Orders(56.0% v 50.3%), Employment(46.5% v 46.4%), Backlog of Orders (40.4% v 44.3%) and Business Activity (55.0% v. 52.6%). The Prices Paid Componentfell to 69.2% during August from 69.9% during July. (Source, Institute for Supply Management)
- The U.S. Trade Deficitwidened to $78.3 billion during July from $59.1 billion in June. The value of Exportsrose 0.29% to $280.5 billion from $279.7 billion while the value of Imports rose 5.90% to $358.8 billion during July from $338.8one-month prior. According to Haver Analytics, “the U.S. goods trade deficit with China in July widened to $14.7 billion from $9.4 billion in June. Exports to China edged down 0.2% m/m while imports from China jumped 27.3% m/m, their largest monthly increase since 2020. The trade deficit with the European Union narrowed further to $8.6 billion in July from $9.5 billion in June. The deficit with Japan narrowed further to $4.8 billion from $5.7 billion in June.”(Source, Bureau of Economic Analysis)
- The Institute for Supply Management’s composite index of manufacturing sector activityimproved to 48.8 during August compared to 48.0 in July. Generally, a reading above 50% indicates that the manufacturing economy is expanding, below indicates one in contraction. Of note were the changes in New Orders(51.4% v. 47.1%), Production (47.8% v. 51.4%), Supplier Deliveries(inverse, higher number indicates slower delivery times)(51.3% v. 49.3%), Inventories (49.4% v. 48.9%) and Employment(43.8% v. 43.4%). The Prices Paid Componentfell to 63.7% during August from 64.8% during July.
- U.S. Construction Spendingfell 0.1% in July, after sliding 0.4% in June. Over the past year Construction Spending has fallen 2.8%. Private Construction Spendingfell 0.2% in July (-4.6% y/y), after falling 0.5% during June. Private Residential Construction Spendingrose 0.1% during July (-5.3% y/y), after falling 0.6% in June. Private Nonresidential Construction Spendingfell 0.5% during July, after falling 0.4% in June (-3.7% y/y). Lastly, spending on Public Projectsrose 0.3% during July (3.4% y/y), after remaining unchanged during June. (Source, U.S. Census Bureau)
Economic Reports scheduled to be released this week include the following – on Monday, July Consumer Credit; on Wednesday, August Wholesale Inflation as measured by the Producer Price Index (PPI); on Thursday, the Weekly Report of Initial Claims for Unemployment Benefits along with August Retail Inflation as measured by the Consumer Price Index (CPI); and, on Friday September Preliminary Reading on Consumer Sentiment from the University of Michigan.
Several companies of note are scheduled to report quarterly earnings this week, to includeCasey’s General Stores (CASY), Chewy (CHWY), AeroVironment (AVAV), GameStop (GME), Adobe (ADBE), and Kroger (KR).