The carryover effects of the Federal Reserve striking a dovish tone in Jackson Hole on August 27th continued into this week for the most part. Even a poor U.S. jobs report on Friday morning couldn’t derail the slow but steady increase in equities globally. Before getting to the weaker-than-expected U.S. employment date, let me mention two other things.
U.K. economic data continues to trickle in that is indicating a strong recovery in the U.K. services sector, with the U.K. – unlike much of the rest of the world – saddled less by COVID-19 concerns. In the U.K., 64% of the population has been double-vaxxed (vs 64% in mainland China, 61% in France, 53% in the U.S. and 47% in Japan; source: ourworldindata.org). Having said this, it seems to mean little as far as U.K. equity market performance. U.K. equities continue to struggle to find higher ground (FTSE 100 -0.1% W-o-W), with the FTSE significantly lagging both the broader European market and the U.S. equities YtD.
As you can see in the table above, the Nikkei 225 (Japan) had its biggest rally in months, leading all indices that I track this week with a gain of 5.4%. I had written during the summer that I felt the focus on the Summer Olympics in Tokyo as the pandemic worsened was creating a noticeable drag in the Japanese equity market. The catalyst that seemed to really bring this to a head was the surprise offer on Friday of PM Yoshihide Suga to resign, as investors cheered the possibility of a new government being formed in Japan to better address the worsening pandemic. It feels to me like Japanese equities might gradually catch up with other developed equity markets because the performance of Japanese stocks was so poor in the April to July period (-6.5% over this four month period).
As far as the U.S. jobs report for August that was released before the market opened on Friday (here), payroll growth was significantly below consensus expectations, coming in at 235,000 vs expectations of 720,000. Even though the unemployment rate fell further to 5.2% in August (in line with expectations), this significant miss on jobs could have easily rattled markets because it signals that the U.S. economy could be stalling. Digging deeper, wages were up 4.3% (Y-o-Y), but services sector hiring seemed to stall after a torrid July, likely due to concerns around, and growth in cases of, the Delta variant across much of the U.S. However, the U.S. Treasury and U.S. equity markets struck a tone of indifference, which I believe happened for two reasons. Firstly, there are some who believe that the jobs report was a temporary aberration, meaning it is simply an issue of timing, and that the “missing” jobs in August will be added in September. Time will tell, with the September jobs report to be released in early October. Secondly, there are those who believe that the jobs report, although disappointing, is another indication that the Fed should not take its foot off the accelerator anytime soon. This logic suggests that stimulus will continue and – when wound down – will be done so slowly and cautiously.
U.S. equities brushed off the jobs report on Friday, ending the week in positive territory aside from the more inflation-sensitive DJIA.
More broadly regarding the U.S. economy, I read through the recent Moody’s Analytics report which contained revised projections for the US economy – see Moody’s Analytics’ “Weekly Market Update” dated Sept 2 here (especially pp 9-10). Moody’s has revised down real GDP growth in the U.S. for FY2021 to 6.3% (from 6.6%), and for FY2022 to 4.5% (from 5%). Bloomberg consensus is apparently 6.5% for FY2021 and 4.2% for FY2022. Moody’s believes that real GDP growth in the U.S. in FY2023 will be in the range of 2.3% to 2.6%. Unemployment was not revised, still expected to be back to 3.5% by the end of next year (4Q2022). Moody’s expects the yield on the 10y UST to average 1.70% in 4Q2022, and if they are correct, UST’s will be heading lower (in price) from current levels. Importantly, these revisions assume that the bipartisan-supported $550 billion infrastructure plan will be approved very soon. However, the figures do notinclude the economic effects of the additional $3.5 trillion Democrat-designed fiscal stimulus plan which is currently being debated and is likely to pass in some form and amount via the reconciliation process. According to Moody’s, if approved at the $3 trillion level, this could add an incremental 1%/annum to real GDP growth in the U.S. from FY2023 forward.
The reality is that nothing seems to be in the way of the continued upward, albeit “slow & steady”, trajectory in global equities because central banks in the larger developed markets, led by the Federal Reserve, will err on the side of caution in ensuring that they do not rattle financial markets as they unwind stimulus. Having said this, we are most certainly in a bubble, at least as far as U.S. equities, and it is a matter of whether it will be deflated slowly or it will burst more quickly. If you want to hear more about why the U.S. equity markets are in a bubble, one of the best explanations I have heard is from legendary investor Jeremy Grantham. Give this a listen: “Stock Market Bubbles with Jeremy Grantham” on The Investor’s Podcast Network which you can find here (released on August 19th, 2021, two weeks ago). His comments on the Fed’s long-standing bias towards wealth accumulation and the magnitude of a potential correction in U.S. equities will make you think.
Below are updated tables for U.S. Treasuries and international government bonds.
As you can see, yields ticked up a few basis points in all markets except Japan last week, with more pronounced yield increases coming in the U.K. and Eurozone.
The table below contains updated prices and returns for safe haven and other assets.
There is a smattering of economic data to be released this coming week, but keep in mind that Monday is a holiday in the U.S. (Labor Day), so the hangover from the jobs report – if any – will not really be visible aside from the futures market until Tuesday.
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