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Markets and macro insights with Sebastian Orsi, CFA, Senior Research Analyst
What happened last week in markets?
- It was a holiday shortened week in the US but there were several important economic releases. We had the ISM business surveys, we had the Fed’s Beige Book which discusses regional economic developments and to finish the week we had the monthly US jobs data for August, which followed a weak July result. There are clear signs that the US economy and labour market are softening, although most indicators suggest it is still growing.
- Equity markets were down about 2.5% for the week before the US jobs data, but then declined further on Friday for -4.1%. Bond yields declined, shifting curves lower by ~0.2% in the US and 0.1% in Europe. After payrolls, markets priced in a greater than 50% chance of a 50bp cut, but then reversed and priced slightly less than the 42% chance they were giving it going into the day. Even when equities then sold off, it was only the further-out contracts that resumed the rally.
- August payrolls came in at +142,000 which was lower than the 160,000 expected. The unemployment rate of 4.2% was in line with expectations. The jobs numbers for the prior two months were revised down by a combined 86,000. Despite the headline numbers being soft, the key takeaways appear to be that while slowing, there’s still employment growth and the level of unemployment ticked back down.
- The US ISM Manufacturing Survey suggests that the manufacturing sector has been in recession for an extended period, albeit a mild one. It came in at 47.2, slightly below expectations, but was up from 46.8 last month. New orders were a key weakness. Manufacturing is a small part of the US economy, so unlikely to tip the broader economy over, especially as the ISM Services survey showed steady growth at 51.5 with steady employment and strong new orders.
- The US Fed’s Beige Book was released on Wednesday and noted mixed economic indicators in several regions.
- In other news, there were press reports of antitrust investigations into Nvidia which drove a sharp decline in its share price; this weighed on indices and the technology sector given its large size.
- Overall, markets are working through a growth slowdown, and there is speculation about its potential severity, will it be trend growth, or is there a recession pending in the very near term? The rising risk of recession is normal as economic expansions age, and this is increasing volatility in equity markets and pushing bond yields down, shifting the curves lower. Markets are also discounting a policy response, whether the US Federal Reserve could be more aggressive and cut by 0.50% in September.
- We can see the growth scare impact on equity markets in the recent sector performances. Cyclicals declined and bounced more after the July jobs weakness. In the current selloff, the laggards are IT/Mag 7 stocks, the commodity sectors, and other cyclicals, although all sectors declined last week.
The week ahead: what to watch out for
US inflation data and the ECB meeting are the key economic events next week. US Core CPI (ex-Food & Energy) will be released on Wednesday and is expected to show a stable month-over-month trend of +0.2%. Headline CPI is expected to decline to 2.6% year-over-year from 2.9% last month. PPI data on Thursday is expected to show a slight increase month-over-month, but a decline in year-over-year data. The ECB Governing Council meeting is on Thursday and markets are pricing a 0.25% cut to interest rates. The outlook commentary and updated forecasts for growth and inflation will be the market focus. The impact on euro exchange rates will be of interest given the recent currency strength.
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