Week ended Sept 1, 2023: Good enough
WHAT HAPPENED THIS WEEK THAT MATTERED?
“Good enough” might be the best description of the string of economic data released this week in the US, as the Goldilocks scenario continues to play out brilliantly. The JOLTS report released on Tuesday (here) showed that new job openings fell in July for the second consecutive month, suggesting a jobs market that might finally be normalising. On Friday, the August jobs report (here) showed that unemployment increased slightly and wage growth moderated, even though non-farm payrolls increased more than consensus expectations. It’s a perfect balance really, and bond investors – getting an ever-increasing scent of a potential Fed pause and perhaps even an earlier-than-expected pivot – responded by piling into Treasuries, pushing yields lower across the curve. Risk markets reacted just as you might expect, with equities heading higher as yields fell. Lest we get too far ahead of ourselves though, it feels too soon to me to conclude that inflation is under control, even though it has been trending lower. And I think it is also silly to completely dismiss the other side of the coin of a worsening jobs market – what if it goes too far? In spite of these concerns, investors embraced the confluence of economic news as confidence increased that the US economy might just navigate the Fed-coveted soft landing.
The rest of the world is another matter though, as Europe and China face more economic uncertainty and headwinds. Even so, it didn’t seem to bother equity markets which were better on the week nearly everywhere.
In Europe, higher-than-expected inflation in the Eurozone (both headline and core 5.3% YoY, Eurostat report here), coupled with a contraction in the economy of the common currency’s largest member-state Germany in the second quarter, has put concerns about a protracted period of stagflation back on the table. The “sluggish growth + stubborn inflation” scenario has certainly created a dilemma for the ECB, which must be on the fence as to whether or not to increase its short-term policy rates at its next meeting on September 14th. My bet is that the ECB blinks and holds rates steady.
The smaller U.K. economy is probably in even more trouble because it lacks the size and diversity of the Eurozone, even with the upward revisions to 2020 and 2021 GDP published by the ONS this week (here). (Does that even matter really?). Getting inflation under control in the U.K. seems to be more difficult, perhaps because higher wages – and the growing negotiating power of employees / unions in the small island country – is creating a difficult-to-slow wage-price spiral. House prices are also continuing to decrease, with August experiencing the largest decrease in YoY prices (-5.3% vs August 2022) since 2009, according to the Nationwide House Price Index(here). I sure hope those foreign zillionaire owners of real estate in London keep coming to their London playground and spending money like drunken sailors, because it might be the main thing keeping the U.K. economy going at all. That aside, a (negative) wealth effect is at some point inevitable as most folks will feel poorer and curtal spending. To make matters worse, there’s the reality of mortgage resets / refinancings that continue to increase month after month, biting into consumer purchasing power. Yikes – I see nothing but gloom. Can someone please pull me back from the abyss?
I suppose better news came this week from Asia, specifically China, which finally announced some more powerful and definitive steps to reinvigorate its slowing economy. Investors certainly liked hearing this, as Chinese equities strengthened.
MARKETS THIS WEEK
Even though August was a disappointing month for most indices and asset classes, investors are starting September with some decent tailwinds, following a good week for asset performance nearly across the board. Recall (for non-American readers) that there is the Labor Day holiday on Monday in the US which will lead to quiet start to the week. Here’s a quick summary of performance this past week.
Global equities rallied across the board, dampening the otherwise dismal returns for the month of August. Every index EMC tracks was better this week, hopefully a harbinger of where we are heading. Constructive steps announced by China to get their economy out of a funk cheered investors in China and, more broadly, emerging markets.
US equities were balanced and fairly solid across the board, with value having a slight edge at the expense perhaps of traditional “old economy” large cap names.
Yields on US Treasuries fell across the board, more acutely at the policy-sensitive short end of the curve as we headed into the long weekend. As mentioned, the perfect storm of economic data has inspired confidence that the Fed will pause its rate increases again at the next FOMC meeting Sept 19-20. According to the CME FedWatch Tool (here), the probability that the Fed will hold the Fed Funds rate at the current level at its Sept 20th meeting has risen to 93%.
Corporate credit (bonds) and the US Dollar were stable, but the price of oil continued to increase. Gold got a boost too, bucking the normal reaction to the risk-on sentiment.
Labor Day holiday in the US on Monday, US bond and stock markets closed
Eurozone: PPI (July), retail sales (July) and 2Q23 GDP; German PMI (Aug), CPI (Aug), factory orders (July) and industrial production (July)
UK: retail sales (Aug)
US: factory orders and PMI (Aug)
Asia: trade data for China (Aug) and 2Q23 GDP(+deflator) for Japan
Upcoming central bank meetings are as follows:
Federal Reserve (FOMC): Sept 19-20 (with updated projections), expectation pause
ECB: Sept 14, on the fence (I say pause)
Bank of England: Sept 21 (tough call, I say increase)
Bank of Japan: Sept 21-22 (do you need to ask?)
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets