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The roughly $25 trillion Treasury market first began flashing this telltale sign that a U.S. recession likely lurks on the horizon almost a year ago, according to Bespoke Investment Group.
It was late October of 2022 when the 3-month Treasury yield BX:TMUBMUSD03M first eclipsed the 10-year Treasury yield BX:TMUBMUSD10Y, resulting in an “inversion” of a key part of the yield curve that’s been a reliable predictor of past recessions.
Where…
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The Federal Reserve’s inflation fight has been particularly brutal for anyone not already a U.S. homeowner before interest rates and mortgage rates rose to 15-year highs.
With mortgage rates around 7.2% to kick off the post–Labor Day period, the difference between the rates on a new 30-year home loan and on all outstanding U.S. mortgage debt (see chart) has not been so wide since the 1980s.
Glenmede, FactSet
“Generally, climbing interest rates curb demand and cause housing prices to fall,” Glenmede’s investment strategy team wrote, in a Tuesday client note, but not this time.
Instead, U.S. homes remain in critically low supply after more than a decade of underbuilding, and with most homeowners who already refinanced at low pre-pandemic rates being “reluctant to leave their homes,” wrote Jason Pride, chief of investment strategy and research, and his Glenmede team.
Also, while homes prices have come off their prepandemic highs, they still were fetching $416,000 in the second quarter, based on median sales prices, above $358,700 in the fourth quarter of 2020, according to U.S. Census and HUD data.
“Until the supply gap is filled by new construction, home prices and building activity are unlikely to decline as meaningfully as they normally would given the headwind from rising rates,” the Glenmede team said.
Read: Housing affordability is now at its worst level since 1984, Black Knight says
The Glenmede team, however, does expect more pressure on consumers in the coming months, particularly as student-loan payments resume in October and if the Fed keeps interest rates high for a while, as increasingly expected. The benchmark 10-year Treasury yield
BX:TMUBMUSD10Y,
which underpins the U.S. economy, was back on the climb at 4.26% Tuesday.
Meanwhile, shares of home-vacation rental platform Airbnb Inc.
ABNB,
rose 7.2% on Tuesday, after the Labor Day weekend, and 66.4% higher on the year so far, according to FactSet.
Don’t miss: New York City cracks down on Airbnb and other short-term-rental listings
Shares of Invitation Homes Inc.
INVH,
which grew out of the last decade’s home-loan foreclosure crisis to become a single-family-rental giant, were up 14.3% on the year, according to FactSet.
Dallas Tanner, CEO of Invitation Homes, said he expected “the rising costs and the burden of homeownership” to continue to benefit his company, in a July earnings call. The company recently bought a portfolio of about 1,900 homes and has been snapping up newly constructed homes. Companies can borrow on Wall Street at much lower rates than individuals.
Stocks closed lower Tuesday, with the Dow Jones Industrial Average
DJIA
off 0.5%, and the S&P 500 index
SPX
0.4% lower and the Nasdaq Composite Index
COMP
down 0.1%, according to FactSet.
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U.S. stocks closed lower Tuesday after the long Labor Day weekend, as bond yields and oil prices climbed. The Dow Jones Industrial Average DJIA shed about 195 points, or 0.6%, ending near 34,642, according to preliminary FactSet data. The S&P 500 index SPX dropped about 0.4% and the Nasdaq Composite Index COMP fell 0.1%. Investors returned from the long weekend in a less bullish mood on weaker economic data from China and Europe, but also with more clouds on the horizon in oil markets. Oil prices CL00 closed at the highest level since November on Tuesday, after Saudi Arabia and Russia opted to extend oil supply production…
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Is the Stock Market Open Today? These Are the Trading Hours for Labor Day.
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With second-quarter earnings season now largely behind the market, stock investors have been focusing on the latest economic data.
They have, for the most part, been reacting positively to “bad economic news,” or any data that may point to an economic slowdown.
It’s been almost nine months since the trend emerged, as softening economic data and lower inflation may mean the Federal Reserve can stop raising interest rates, said Chris Fasciano, portfolio manager at Commonwealth Financial Network.
Traders in federal-funds futures, as of Friday, are pricing in an over 90% chance that the Fed will hold its policy interest rate unchanged at its September meeting, and a roughly 35% likelihood that the U.S. central bank will raise interest rates by 25 basis points in November.
U.S. stocks closed the week higher ahead of the Labor Day holiday weekend, after data released Friday indicated a cooling labor market, though there was speculation that a “mirage” concerning the conclusion of summertime jobs may have factored. The U.S. created 187,000 new jobs in August, while the unemployment rate jumped to 3.8% from 3.5%.
The data support the narrative of a gradual slowdown in the labor market, but there are no signs that the economy is weakening significantly, according to Richard Flax, chief investment officer at Moneyfarm.
Also read: ‘Near perfect’ jobs report has traders expecting Fed to be done hiking rates this year
“The economic data has not been bad. It is just softening. If you saw really bad economic data, that wouldn’t be taken particularly positively,” Flax said.
Meanwhile, “what we’re experiencing is a rolling recession,” said Jamie Cox, managing partner at Harris Financial Group. “Recession activity actually goes from sector to sector, but it doesn’t translate into this big broad-based decline.”
However, if investors see a significant decline in the housing and labor markets, that could change the narrative, Cox noted.
To break the cycle in which bad economic news is good news for stocks, economic data have to be much worse than now, indicating more damage from high interest rates, noted Flax.
The trend may also reverse if there is a “meaningful downgrade” of corporate earnings expectations, said Flax. “I think you need to see it when macro data translates into weakened profitability.”
Investors should also be alert of the possibility that inflation may accelerate again, according to David Merrell, founder and managing member at TBH Advisors.
Data showed that the personal consumption expenditures price index rose a mild 0.2% in July, but the yearly inflation rate crept up to 3.3% from 3%, the government said Thursday.
“Inflation overall has been trending down nicely. But if it starts to kick back up, that could mean bad news becomes bad news now,” said Merrell.
If investors start to treat bad economic news as bad news for the stock market, it could put pressure on the 2023 stock-market rally, with the S&P 500
SPX
up 17.6% since the start of the year and the Nasdaq Composite
COMP
up 34%.
In the past week, the Dow Jones Industrial Average
DJIA
climbed 1.4%, the S&P 500 advanced 2.5% and the Nasdaq gained 3.2%, according to Dow Jones Market Data. The S&P 500 posted its biggest weekly gain since the week ending June 16.
This week, investors will be expecting data on the July U.S. international trade deficit and the ISM services sector activity for August on Tuesday, weekly initial jobless benefit claims data on Thursday, and the July wholesale inventories data on Friday. They will also tune into the speeches of a number of Fed speakers, looking for clues on whether the central bank is ready to be done with its rates hikes.
Economic calendar: On this week’s economic-data docket are the Fed Beige Book, factory orders, unemployment claims and more
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U.S. lawmakers are due to get back to work Tuesday on Capitol Hill, and there are growing expectations that one fruit of their labors will be a partial government shutdown.
“My guess is that we will have a lot of screaming and shouting, and we’ll end up shutting down the government, and a lot of people will be inconvenienced or hurt as a result of doing that, but we’ll do it,” said Republican Sen. Mitt Romney of Utah in an interview with a TV station in his home state.
“And by the way, we’ll shut down government, and then we’ll open it. It’s not like that means that we win. No, no. We just shut it down to show that we’re fighting and making noise.”
Investors should view the shutdown as largely noise, according to a number of analysts in Washington, D.C., who track lawmakers’ moves for Wall Street.
“The stakes here are significantly lower than they were back in June, when we were facing default,” said Ed Mills, Washington policy analyst for Raymond James, referring to lawmakers’ efforts to reach a deal on raising the U.S. debt ceiling in order to avoid a market-shaking default.
“For the most part, this is a 1 or 2 on a scale of 1 to 10 in terms of concern,” Mills told MarketWatch, adding that a U.S. default, on the other hand, would have registered as a 10 on that scale.
There have been six government shutdowns since 1978 that lasted five days or more, and the S&P 500 stock index
SPX
gained in the four most recent shutdowns. Brian Gardner, chief Washington policy strategist at Stifel, emphasized that history in a note to clients.
“Headlines regarding a potential budget impasse will grow and there could be a whiff of panic in the air, but investors should take all of this in stride. Markets tend to ignore the impact of a government shutdown,” Gardner wrote, as he offered the chart shown below.
Stifel
From MarketWatch’s archives (September 2021): Here’s how the stock market has performed in past government shutdowns
And from January 2019: The latest government shutdown is ending, after becoming the longest on record — by a wide margin
Stifel’s Gardner said that while past shutdowns suggest that investors should not panic, there still is some damage.
“There will be extensive media coverage of closed entrances at national parks and other government facilities. Government salaries will not be paid on time which is, certainly, a hardship for some families,” he wrote. At the same time, he emphasized that “much of the country will operate as usual,” including the military
ITA
and air traffic controllers — and missed paychecks will come through once the shutdown ends.
From MarketWatch’s archives (January 2019): How furloughed federal workers can rebuild their finances after the shutdown
“From a market perspective, the biggest concern relating to a government shutdown is that it could delay official government data reports at a pivotal time for the Federal Reserve,” said BTIG’s Issac Boltansky and Isabel Bandoroff in a note.
Related: Jackson Hole recap: Fed rate hikes likely on hold for ‘several meetings’
The BTIG analysts said they expect a shutdown will occur but it should be a “nonevent for markets” overall, because it “would have no impact on debt payments and any missed activity would be settled on the other side of reopening.”
There could be a greater-than-anticipated impact on stocks
DJIA
COMP
if the shutdown lasts for a longer time than expected, and if the deal to end the shutdown features unexpectedly large cuts to spending along with significant repeals of Democrats’ Inflation Reduction Act, according to Mills, the Raymond James analyst.
“The most likely scenario is that it’s days, not weeks,” he said, regarding the length of any shutdown. He also noted it could hit consumer confidence and disrupt the initial-public-offering process for some companies.
Only one chamber of Congress is returning to Washington on Tuesday, the day following Labor Day, after an August recess — the Senate. The House of Representatives is slated to resume its work on Capitol Hill a week later, on Sept. 12.
Ahead of their returns, the Biden White House’s budget office has pushed for passage of a short-term funding measure to avoid a partial federal government shutdown on Oct. 1, when the government’s 2024 fiscal year starts.
Such a measure is known as a continuing resolution, or CR, and they’re often used as the House and Senate work to agree on a dozen appropriations bills that would fund government operations for a full fiscal year.
The debt-ceiling deal negotiated between House Speaker Kevin McCarthy and President Joe Biden set spending levels over the next two years, keeping nonmilitary spending for 2024 the same as 2023 levels. But House Republicans have adopted spending targets for the coming fiscal year at levels below the McCarthy-Biden agreement.
McCarthy has raised the idea of a short-term funding bill with his fellow Republicans.
“The thing that Kevin McCarthy is trying to tell his caucus is that we probably need to have a short-term CR, so that the House can finish its work on appropriations bills and establish the best negotiating position,” Mills said.
The House Freedom Caucus, a hardline GOP group known for causing headaches for the chamber’s leaders, has voiced concerns. It said in an Aug. 21 statement that its members want to rein in outlays and will oppose any spending measure that doesn’t include a House-passed bill focused on security at the U.S. southern border. In addition, the group said any spending measure must address the “unprecedented weaponization” of the Justice Department and the FBI, as well as end “woke policies in the Pentagon.”
The most likely path forward is the GOP-run House passes a short-term funding measure that incorporates House Freedom Caucus goals, and then there’s a showdown with the Democratic-controlled Senate over those policy riders, with a short-lived shutdown potentially taking place, Mills said.
The Raymond James analyst said the most likely deal is a budget that’s in line with what was negotiated as part of the debt-limit deal. He also expects supplemental measures that provide relief for areas hit by Hurricane Idalia and the Maui wildfires, as well as some funding for Ukraine as it continues its fight against Russia’s invasion.
“For investors, they have seen McCarthy go up to the brink, go through a tough situation and be able to pull a rabbit out of it,” Mills said, referring to his January battle to become House speaker and the spring’s debt-limit talks. And they’ve “gone through government shutdowns in the past, mostly with very minimal market reaction,” he added.
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U.S. exchange-traded funds that invest in Chinese stocks notched their best day in a month after China ramped up its efforts to support the country’s flagging currency as investors’ concerns over the economic weakness persist.
The People’s Bank of China said Friday it will lower the amount of foreign-exchange deposits financial institutions are required to hold for the first time in 2023, a move seen as a bid to shore up the Chinese yuan, which has tumbled this year as the world’s second largest economy has faltered due to a property-market downturn, sluggish domestic consumption, and the ballooning local government debt pile.
The Invesco Golden Dragon China ETF
PGJ,
which tracks the American depositary shares of companies based in China, rose 3% on Friday, while the KraneShares CSI China Internet ETF
KWEB,
which offers exposure to Chinese software and information technology stocks, gained 3.5%. The iShares MSCI China ETF
MCHI
advanced nearly 2.2% and the SPDR S&P China ETF
GXC
surged 2%, according to FactSet data.
The iShares MSCI China ETF and the KraneShares CSI China Internet ETF booked their biggest daily percentage advance since August 3, according to FactSet data.
China’s central bank will cut the foreign-exchange reserve requirement ratio to 4% from 6% beginning Sept. 15. The move is expected to increase the supply of foreign currencies available in local markets, making the Chinese yuan more appealing for domestic investors.
See: China’s central bank to cut FX reserve ratio
Based on about $822 billion foreign-exchange deposits in July, the 200-basis-point cut in the reserve requirement ratio could release about $16 billion, which will improve the supply of the U.S. dollar onshore, and could move spot USDCNY lower, said strategists at Citigroup led by Johanna Chua, chief Asia economist.
“In a broader picture, this can be also seen as part the current round of accelerated policy rollout which works more directly on asset markets. If the accelerated pace [of policy rollout] continues, it may help stabilize sentiment to some extent and prevent outsized bearish moves on China risk assets including the RMB FX,” they wrote in a Friday note.
The onshore yuan
USDCNY,
weakened around 1.7% against the dollar in August, extending its losses for the year to nearly 5%, according to FactSet data. The offshore yuan
USDCNH,
was trading at 7.27 per dollar Friday afternoon.
See: Chinese Property Stocks Gain on Stimulus Measures
Friday’s change to reserve requirement ratio came a day after Chinese authorities announced that homebuyers’ minimum down payment will be reduced to 20% for first-time home purchases, and 30% for second-home purchases nationwide, according to a joint statement from the People’s Bank of China and National Administration of Financial Regulation late Thursday.
Currently, homebuyers in largest cities such as Beijing and Shanghai have a 30% down payment ratio for first homes, and 40% or more for second homes.
Separately, big banks, such as Industrial & Commercial Bank of China
601398,
and Bank of China
601988,
have said they would cut their one-year yuan deposit rate by 10 basis points to 1.55% and their two-year yuan deposit rate by 20 basis points to 1.85%. The banks also plan to cut mortgage rates to boost consumption and aid the troubled property sector.
The broader U.S. stock market finished mostly higher on Friday as traders weighed the latest jobs report to conclude the final trading day before the Labor Day holiday weekend. The S&P 500
SPX
was up 0.2%, while the Dow Jones Industrial Average
DJIA
advanced 0.3% but the Nasdaq Composite
COMP
ended nearly flat.
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The Federal Reserve can probably end its inflation fight now that the U.S. labor market is cooling after generating a historic 26 million jobs in roughly the past three years, according to BlackRock’s Rick Rieder.
“In fact, 26 million jobs is like adding an economy the size of Australia or Taiwan (including every man, woman, and child),” said Rieder, BlackRock’s chief investment officer in global fixed income, in emailed commentary following Friday’s monthly jobs report for August.
The August nonfarm-payrolls report showed the U.S. adding 187,000 jobs, slightly more than had been forecast, but also pointing to an uptick in the unemployment rate to 3.8% from 3.5%.
“Remarkably, 22 million people were hired between May 2020 and April 2022, and 11 million were added to the workforce from June 2021 to May 2023, as the economy has opened up massive amounts of roles for fulfillment,” said Rieder.
He expects wage pressures to ease, he said, and thinks the “economy may now have fulfilled many of its needs,” which should make the Fed feel more confident in “the permanence of lower levels of inflation,” so that it can slow or stop its interest-rate rises by year-end.
Hiring in the U.S. has slowed, except in education and in healthcare services, when looking at private payrolls based on a three-month moving average.
Bureau of Labor Statistics, BlackRock
The Fed has already raised interest rates in July to a 5.25%-to-5.5% range, a 22-year high, with traders in federal-funds futures on Friday pricing in only about a 7% chance of a Fed rate hike in September and favoring no hike again at the central bank’s November policy meeting.
Rieder of BlackRock, one of the world’s largest asset managers with $2.7 trillion in assets under management, said he thinks a Fed pause or outright end to rate hikes could calm markets, even if the Fed, as BlackRock expects, keeps rates high for a time.
U.S. closed mostly higher Friday ahead of the Labor Day holiday weekend, with the Dow Jones Industrial Average
DJIA
up 0.3%, the S&P 500 index
SPX
up 0.2% and the Nasdaq Composite Index
COMP
0.02% lower, according to FactSet.
The 10-year Treasury yield
BX:TMUBMUSD10Y
was at 4.173%, after hitting its highest level since 2007 in late August, adding to volatility that has wiped out earlier yearly gains in the roughly $25 trillion Treasury market.
Read on: This hadn’t happened on the U.S. Treasury market in 250 years. Now it has.
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U.S. stock futures pointed higher on Friday, ahead of data that could show a slowing pace of hiring, which would reassure investors that the Federal Reserve won’t take interest rates much higher.
On Thursday, the Dow Jones Industrial Average
DJIA
fell 168 points, or 0.48%, to 34722, the S&P 500
SPX
declined 7 points, or 0.16%, to 4508, while the Nasdaq Composite
COMP
gained 16 points, or 0.11%, to 14035.
Ahead of Friday’s barrage of heavy-hitting economic data, U.S. stocks saw modest pressure, as inflation data was largely benign but jobless claims dented an emerging picture of an economic slowdown. Dollar General’s
DG,
profit warning, however, pointed to a consumer under pressure.
Friday will see the release of nonfarm payrolls data at 8:30 a.m. Eastern, with expectations that 170,000 jobs were created in August. That would be the weakest showing since Dec. 2020, a month that saw 268,000 jobs lost.
“There have been indicators that the U.S. jobs market is finally starting to lose some of its tightness, and if the NFP print confirms this trend, it will be one less thing for the FOMC to worry about given labor market resilience has long been a source of inflationary pressure,” said Tim Waterer, chief market analyst at KCM Trade.
There’s also the Institute for Supply Management’s manufacturing index, as well as monthly auto sales, that will get released. Thursday’s after hours releases saw mixed responses, with Dell Technologies
DELL,
stock rallying but Broadcom shares
AVGO,
wilting after results.
In China, August Caixin manufacturing PMI came in above expectations, rising to 51, a level that indicates improving conditions, as the country also lowered down-payment requirements on homes. The Hong Kong market was shut over storm-related concerns.
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LCG Auctions
Not even
Apple was invincible to this tough August. And if investors are pinning their hopes on the iPhone 15 launch in just a couple of weeks, they could very we…
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The U.S. Labor Day holiday will mark another milestone in the marathon to bring workers back to the office, but it won’t be a quick fix for landlords, according to Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics.
Employers from Facebook parent Meta
META,
to Goldman Sachs
GS,
recently laid out mandates for staff to return to the office more frequently, starting this fall, including the big one — the federal government.
“A lot of companies are saying that after Labor Day, ‘We expect more out of you,” LaSalvia said, referring to days in the office. Still, office attendance, he argues, likely only stages a fuller comeback if a job or promotion is on the line.
Amazon.com Inc.’s
AMZN,
Chief Executive Andy Jassy has been trying to drive home the point by warning staff to return at least three days a week, or face the consequences.
That could prove difficult, with Friday’s U.S. jobs report for August expected to show U.S. unemployment at a scant 3.5%, near the lowest levels since the late 1960s, even if hiring has been slowing. The labor market, so far, appears unfazed by the Federal Reserve’s benchmark rate reaching a 22-year high.
It has been a different story for landlords facing a roughly 19% vacancy rate nationally and piles of debt coming due, especially for owners of older Class B and C office buildings with a bleak outlook or properties in cities with wobbling business centers.
See: San Francisco’s office market erases all gains since 2017 as prices sag nationally
As with shopping malls, LaSalvia said it’s largely a problem of oversupply, with many office properties at risk of becoming obsolete as tenants flock to better buildings and locations staging a rebirth. The trend can be traced in leasing data since 2021, with Class A properties in central business districts (blue line) showing a big advantage over less desirable buildings in the heart of cities (orange line).
Moody’s Analytics
“Little by little, we are finding the office isn’t dead,” LaSalvia said, but he also sees more promise in neighborhoods with a new purpose, those catering to hybrid work and communities that bring people together.
Another way to look at the trend is through rents. Manhattan’s Penn Station submarket, with its estimated $13 billion overhaul and neighboring Hudson Yards development, has seen asking rents jump 32% to $74.87 a square foot in the second quarter since the fourth quarter of 2019, according to Moody’s Analytics. That compares with a 2% bump in asking rents in downtown New York City to $61.39 a square foot for the same period.
The push for a return to the office also doesn’t mean a repeat of prepandemic ways. Goldman Sachs analysts estimate that part-time remote work in the U.S. has stabilized around 20%-25%, in a late August report, but that’s still up from 2.6% before the 2020 lockdowns.
Furthermore, the persistence of remote work will likely add another 171 million square feet of vacant U.S. office space through 2029, a period that also will see tenants’ long-term leases expire and many companies opting for less space. The additional vacancies would roughly translate to 57% of Los Angeles roughly 300 million square feet of office space sitting empty.
“The fundamental reason why we had offices in the first place have not completely disintegrated,” LaSalvia said. “But for some of those Class B and C offices, the writing was on the wall before the pandemic.”
U.S. stocks were mixed Thursday, but headed for losses in a tough August for stocks, with the S&P 500 index
SPX
off about 1.5% for the month, the Dow Jones Industrial Average
DJIA
2.1% lower and the Nasdaq Composite
COMP
down 2% in August, according to FactSet.
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U.S. stocks scored back-to-back gains on Monday in an attempt to claw back ground in a rough August for equities. The Dow Jones Industrial Average
DJIA,
rose about 213 points, or 0.6%, ending near 34,560, according to preliminary data from FactSet. The S&P 500 index
SPX,
closed 0.6% higher and the Nasdaq Composite Index
COMP,
gained 0.8%. Investors kicked of the final week of August on an upbeat note, while largely focusing on Thursday’s inflation data and Friday’s monthly jobs report to help inform the Federal Reserve’s path on interest rates and its inflation fight. The 10-year Treasury yield
TMUBMUSD10Y,
eased back to about 4.20% late Monday after its sharp rise a week ago to its highest level since 2007. The Dow still was off about 2.8% so far in August, while the S&P 500 index was 3.4% lower and the Nasdaq was down 4.5%, according to FactSet.
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Investors sitting on the sidelines in cash and in money-market funds might consider moving into longer-dated bonds sooner rather than later, according to Saira Malik, chief investment officer at Nuveen.
As look at historical returns shows the broader $55 trillion U.S. bond market typically outperforms short-term Treasurys at the end of past Federal Reserve rate hiking cycles since the 1990s.
The bond market produced an average 5.5% three-month rolling return following the last rate hike (see chart) in the past four Fed hiking cycles, while short-term Treasurys returned 2.1%.
Bloomberg, Nuveen
Of note, the magnitude of the bond market’s outperformance faded by 12 months versus short-term positions, when looking at the Bloomberg U.S. Aggregate Bond Index’s performance relative to the Bloomberg U.S. Treasury 1-3 Year Index.
“The broad market typically experienced a strong relief rally immediately after the Fed pause and mostly outperformed the following year,” Malik said, in a Monday client note. “This lends further credence to our view that overallocating to cash or short-term government debt could be a mistake — and that investors may want to start closing their duration underweights.”
Individuals can gain exposure to Wall Street bond indexes through related exchange-traded funds, including the iShares Core U.S. Aggregate Bond ETF
AGG
and the SPDR Bloomberg 1-3 Year U.S. Treasury Bond UCITS ETF
UK:TSY3
for short-term Treasury exposure.
Fed Chairman Jerome Powell signaled on Friday that additional rate hikes might be needed to keep the U.S. cost of living in retreat, even though rates already sit at a 22-year high and inflation has fallen sharply in the past year, while speaking at the annual Jackson Hole gathering in Wyoming. He also reiterated a vow to keep rates at a restrictive level for a while to keep inflation in check.
Malik pointed to cooling housing inflation as a positive sign on the inflation front. Home buyers have pulling back as the benchmark 30-year mortgage rate hit an average of 7.31%, the highest levels since 2000.
She also expects U.S. economic growth to slow and a “partial retracing” of the 10-year Treasury yield
BX:TMUBMUSD10Y,
following its surge in recent weeks.
“Historically, the 10-year yield has peaked within the last few months of the final rate hike in a tightening cycle. We expect this hike will occur at either the September or November Fed meeting, and that the 10-year yield will decline through year-end.” Yields and debt prices move opposite each other.
Related: Pimco emerges as a buyer in Treasury market selloff, says Bond Vigilante theme ‘a bit extreme’
Stocks were higher Monday, with the Dow Jones Industrial Average
DJIA
up 0.5%, the S&P 500 index
SPX
0.3% higher and the Nasdaq Composite Index
COMP
up 0.4%, according to FactSet.
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This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com.
https://www.barrons.com/articles/xpeng-hong-kong-stock-price-didi-evs-ca20a71d
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The U.S. stock market recovered from a three-week losing streak this week, though release of Nvidia’s earnings and a speech by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium provided some volatility, but the artificial intelligence boom offset rising bond yields.
Next week, the July personal consumption expenditure index, the Fed’s preferred measure of inflation, and the latest monthly employment report will offer another trial for the markets as investors assess whether stocks can defend their recent gains under the “cloudy skies” of uncertainty over the economic outlook.
On Friday, Fed Chair Powell said the central bank is prepared to raise interest rates further until policymakers are confident that inflation is on a convincing path toward the Fed’s 2% target, but he admitted they remain unsure of whether more rate hikes are needed as the economy may not have felt the full effect yet of the monetary tightening over the past year and a half.
“Powell is in this position where he’s trying to summit one of the Grand Tetons and he doesn’t do that without pausing and catching his breath,” said Johan Grahn, head ETF market strategist at Allianz Investment Management. Grahn thinks the Federal Open Market Committee is debating whether they have reached the “summit,” or one of the “peaks,” or are at a “false summit” in their endeavors to curb inflation through interest-rate hikes and demand moderation.
“Powell needs these ‘data clouds’ to give him a sign so that they know if the work is done, and I don’t believe that he will know that between now and September,” Grahn said.
Powell’s heavily anticipated address at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming came days after Nvidia
NVDA,
the chip maker at the forefront of an industry-wide AI frenzy, delivered blowout earnings that surpassed Wall Street’s estimates, thanks largely to a boom in revenue from generative AI. However, both events were largely in line with expectations eliciting yawns from a sleepy August Wall Street, said market analysts.
U.S. stocks finished the week mostly higher with the Dow Jones Industrial Average
DJIA
down 0.5%, while the S&P 500
SPX
gained 0.8% and the Nasdaq Composite
COMP
climbed 2.3% for the week, according to Dow Jones Market Data.
See: Hot U.S. economy pushes real yields to around 15-year highs after Powell’s Jackson Hole speech
However, the biggest event for markets is always the next one.
With the second-quarter earnings reporting season coming to an end, major economic data in coming days will provide some guidance on the resilience of the U.S. economy and whether the Fed will raise interest rates further at its September 19-20 policy meeting.
“There’s a dearth of corporate news that’s really going to move the markets, which means traders and investors are going to focus their attention on the macro components,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.
Next week, the markets will get the latest reports on the jobs market, including the July Job Openings and Labor Turnover Survey (JOLTS) due out on Tuesday, followed by August ADP’s National Employment Report on Wednesday. The Labor Department’s August nonfarm payrolls report will center stage on Friday.
The U.S. economy is expected to add 175,000 new jobs in August, down from 187,000 in the prior month, economists polled by the Dow Jones estimate. The percentage of jobless Americans seeking work is forecast to remain unchanged at 3.5% from the previous month. The central bank in June predicted unemployment would climb to 4.1% by the end of 2023, compared with 4.5% in March’s prediction, according to the quarterly Summary of Economic Projections.
Meanwhile, the Bureau of Economic Analysis on Thursday will release its Personal Consumption Expenditures (PCE) Index — the Fed’s preferred inflation gauge — for July.
Annual U.S. inflation in July is forecast to creep back up to 3.3% year-over-year from 3% in the prior month, while consumer prices are expected to rise another mild 0.2% for the month. The so-called “core” PCE is also expected to tick up slightly to 4.2% from 4.1% in June, according to Wall Street analysts polled by Dow Jones. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends.
Powell, during his speech at Jackson Hole, pointed to the core PCE as his focus. “The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said.
Investors need the “Goldilocks scenario” where economic growth is slowing, but not falling off a cliff, which would suggest that the Fed is closer to being done raising interest rates, Saglimbene told MarketWatch in a phone interview on Friday. “Any stronger than expected economic data, such as hotter-than-expected PCE inflation and employment report, may be greeted by the market as negative.”
While the July PCE report will be the “linchpin” for the September policy meeting, the data would have to skew significantly away from expectations in order for policymakers to take “one more step up this proverbial mountain,” said Grahn.
However, the assessment of the precise level of monetary policy restraint is complicated by uncertainty about the duration of the lags with which monetary tightening affects economic activity and inflation, Powell said on Friday, noting “the wide range of estimates” of these lags suggests that there may be “significant further drag” in the pipeline.
“The lag effect, in my opinion, overshadows the concern that two months of good inflation readings is not a trend,” Grahn told MarketWatch via phone on Friday. “The lag effect is starting to work its way into the economy, but it’s not reasonable to believe it will show the full impact in the next four weeks, so I would expect a meeting in September with a decision to nothing.”
Overall the U.S. stock market has slumped this month as August once again lives up to its dismal reputation for stocks. The S&P 500 has lost nearly 4% so far this month, on course for its biggest monthly loss of 2023, while the Dow Jones Industrial Average was down 3.4% and the Nasdaq Composite has dropped 5.3% month-to-date, according to Dow Jones Market Data.
These pullbacks are seen as a sharp contrast to the AI-driven rally earlier this year when the Nasdaq Composite had its best first-half performance since 1983, as investors hoped the Fed might be able to back off its inflation battle more quickly than markets have expected.
However, recent strong economic data has raised concern that the Fed will keep its benchmark lending rates higher for longer than anticipated, which triggered a jump in longer-dated Treasury yields.
The 10-year Treasury note yield
BX:TMUBMUSD10Y
rose to its highest level since November 2007 on Monday, according to Dow Jones Market Data. Elsewhere, a slowdown in China’s economy after emerging from COVID-19 lockdowns, the lingering debt troubles in its real-estate sector and the uncertainty of Beijing’s policy support are also feeding into broader unease in the U.S. financial markets.
See: Global investors expect China to deliver a massive fiscal stimulus. Here’s why it may never arrive.
August is historically not the best month for the U.S. stock market. Investors came into August of 2023 with five straight months of gains for the S&P 500 index and the Nasdaq Composite, so there was an “excuse” for investors to take profits on megacap technology companies which are trading at “rich valuations,” Saglimbene said.
The weekly AAII Investor Sentiment Survey shows bullish sentiment decreased and is below average for the second consecutive week in the seven days to Wednesday. In the most recent survey, only 32.3% of respondents had a bullish outlook for the stock market, which is below the historical average of 37.5%.
However, historical data shows that September may not look much better than August as September is traditionally the weakest month for U.S. stocks. The S&P 500 and the Dow industrials each has lost an average of 1.1% in September dating back to 1928 and 1896, respectively, according to Dow Jones Market Data.
See: Here are the odds that the stock market will crash
Moreover, there’s still a concern that the Fed is going to raise interest rates again and may slow the economy more than expected, which may end up causing a recession in 2024, said Saglimbene.
“I don’t think traders are ready to step into the market and buy based on these declines, but I do think if we see more pressure in September while macro conditions are holding up, you’re going to have more investors step in and start buying, and that could be more supportive [for stocks] in the back half of this year when seasonality trends get better.”
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U.S. stocks finished higher on Friday, helping the Nasdaq Composite and S&P 500 clinch their first weekly gain after three weeks of losses. The S&P 500
SPX,
gained 29.40 points, or 0.7%, to 4,405, according to preliminary closing data from FactSet. It finished 0.8% higher on the week, snapping a three-week losing streak. The Nasdaq Composite
COMP,
gained 126.67 points, or 0.9%, to 13,590.65. The Dow Jones Industrial Average
DJIA,
rose by 247.48, or 0.7%, to 34,346.90, but notched a 0.5% loss on the week, for its third weekly loss in four. Federal Reserve Chairman Jerome Powell delivered a speech at the Kansas City Fed’s annual symposium in Jackson Hole that moved markets on Friday, although stocks managed to shrug off initial losses to climb higher during the session.
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U.S. stocks so far haven’t fared as well under President Joe Biden as they did in Donald Trump’s single term or in either of Barack Obama’s two terms.
The research team at Wilshire Indexes is pointing that out this month with the chart below, which features the FT Wilshire 5000
XX:W5000FLT,
an index that aims to reflect the performance of the total U.S. stock market.
Wilshire Indexes
Biden and his allies could be worried about how stocks
SPX
are doing, and it’s possible his administration will try to help the market somehow in 2024, according to Philip Lawlor, managing director of market research at Wilshire Indexes.
“With the 2024 election in sight, the disparity in cumulative equity return generated so far under the Biden administration compared to the superior return trajectory delivered by the Trump and Obama presidencies could cause some concern,” Lawlor wrote. “Electoral cycle logic points to the Biden administration doing its utmost to ensure that the gap closes next year.”
Biden officially launched his re-election campaign in April, and the Democratic incumbent and his cabinet officials have traveled around the U.S. in recent months to talk up their economic policies, including measures such as the Inflation Reduction Act.
When asked about the stock market’s struggles earlier this year, one White House official told MarketWatch that the administration wants to see “strong performance,” but he also noted that roughly half of Americans don’t hold stocks and highlighted other economic indicators.
“The markets are going to go up and down. The main measure that the president has about the state of the economy is, how are middle-class families doing?” said Bharat Ramamurti, deputy director of the White House’s National Economic Council.
“Do they have good-paying jobs that allow them to support themselves and their families? Are they seeing their wages go up? Do they feel like they have good opportunities to advance in their career, good opportunities to switch jobs and make more money? Or live in a better neighborhood, or whatever the case may be? By those metrics, we think that the economy is doing very, very well.”
Republican presidential hopefuls made their economic pitches at a debate on Wednesday night in Milwaukee, with Florida Gov. Ron DeSantis, who is currently running second in GOP primary polls, saying the country “must reverse ‘Bidenomics’ so that middle-class families have a chance to succeed again.” Trump, the current frontrunner in the 2024 primary, skipped the debate and instead released an interview just before the event kicked off.
Betting markets tracked by RealClearPolitics give Biden a 35% chance of winning the 2024 presidential election, while Trump is at 27% and DeSantis is at 6%.
COMP
were higher in choppy trading Friday after Federal Reserve Chair Jerome Powell warned that the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that the Fed would proceed cautiously.
From MarketWatch’s archives (Dec. 31, 2022): U.S. stocks log their worst year since 2008, crushed by Fed’s rate hikes
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U.S. stocks ended higher Friday after Federal Reserve Chairman Jerome Powell warned the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that monetary policy would proceed cautiously.
For the week, the Dow fell 0.4%, the S&P 500 gained 0.8% and the Nasdaq climbed 2.3%, according to Dow Jones Market Data. The Dow booked back-to-back weekly losses, while the S&P 500 and technology-heavy Nasdaq Composite each…
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Nvidia Corp.
NVDA,
shares failed to close at a record high Thursday after the AI-chip maker’s stellar earnings report initially boosted shares past $500 for the first time. Shares rose 0.1% to close at $471.74, after trading as high as $502.66 intraday, but fell short of the record closing high of $474.94 set on July 18, according to FactSet data. The earnings report took chipmakers on a ride Thursday, falling from an initial show of strength following the report. Nvidia shares are up more than 222% on a year-to-date basis, compared with a 37% gain in the PHLX Semiconductor Index
SOX,
a 14% rise in the S&P 500
SPX,
and a 29% surge in the tech-heavy Nasdaq Composite
COMP,
over the same span.
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