On Monday evening (NY time), the Caixin (non-government) China Services PMI for August still showed expansion, printing at 51.8, down from 54.1 in July, but well below expectations for 53.5+. While sub-components such as new orders, business activity and employment all showed growth, they all also showed deceleration. In the words of Wang Zhe, who is an economist with Caixin Insight Group, "Overall optimism was limited, as the August reading for their expectations about futures activity recorded the lowest reading since November."
Early on Tuesday morning, Service sector PMIs for August across Europe not only fell short of expectations, they all, or at least those of the largest economies within the European Union, nearly all printed in a state of contraction. Service PMIs for both Spain and Italy surprisingly fell from expansion into contraction, while both France and Germany remained deeply within contractionary territory. The Services for the single currency zone in aggregate printed at 47.9, down from July's 48.3 and below expectations.
This forced equities lower on Tuesday both in China and across Europe and is pressuring U.S. equity index futures overnight. Sovereign debt yields also appear to be rising overnight globally as traders question future prospects for economic growth across the planet's largest economies despite struggling Chinese real estate developer Country Garden having made interest payments on U.S. dollar bonds just hours ahead of a grace period deadline.
The Storm Before the Storm?
The past week was a positive one. It appeared that way almost across the board for equities. Most mid-major to major domestic equity indexes that I follow posted four "up" days in five last week going into the holiday weekend. Most posted "up" weeks, despite closing out a "down" month for August.
What happened? To put it simply, an economy that had appeared to be trending along at what would have to be considered to be "above potential" growth on rising (but not fully recovered) velocity stumbled through a series of disappointing macroeconomic data-point releases last week.
One might think that a suddenly softer batch of macro might weaken the U.S. dollar. However, this is what the FOMC has been pushing for. Though there is debate on Wall Street regarding an eventual easing of policy, we are not hearing anything of the sort from Fed officials. Monetary policy might remain postured as is (higher interest rates for longer), but actual easing would require a much higher bar, and this Fed is still in inflation-fighting mode.
Instead, as the Chinese and European economies stumble more profoundly than what we have seen domestically, a bid has more or less been placed under the U.S. Dollar Index. That should, in theory, on its own, damage prospects for multinational large-cap equity names. Perhaps it has. The Russell 2000 and S&P 600, both small-cap focused indexes, and therefore chock full of constituent names far less likely to be heavily involved in cross-border trade, easily outperformed the S&P 500 and the Dow 30.
However, there is more to the story.
Treasury securities, from the belly of the yield curve out to the long end, pressed lower as the week wore on, and as bond traders increased allocations toward U.S. sovereigns. (These yields started to move higher on Friday and are higher this morning.) This is why the Nasdaq 100 and especially the Philadelphia Semiconductor outperformed the small-caps as equity investors fled more defensive sectors seeking growth. Remember, with stocks, especially growth stocks, "bad can be good." Especially in terms of potentially interest rate-impacting macroeconomic results.
This sudden spurt of weaker-than-anticipated macro did not do a lot of harm to the Atlanta Fed's GDPNow model that still sports quite gaudy looking growth of 5.6% (q/q, SAAR) based on already released data. I am going to try not to use the "R" word, largely because I have overused it in the past, and been wrong, either on the timing of any coming contraction or simply outright.
Our esteemed central bankers have sought out this coming economic deceleration. Is it even here? Now? One week of data does not make a trend. That said, the equity market rally on Friday seemed less aggressive than rallies had earlier in the week. Despite bearing the data with the most gravitational impact.
That fairly weak employment report was considerably weaker than it appeared on the surface. Thursday was a tough day to interpret as well. Last day of the month. Only "down" day of the week for several equity indexes. No obvious window dressing. There certainly had been some alarming internals within the BEA's release of Personal Income and Outlays for the month of July.
Buyer exhaustion? Market participants on the beach? Or maybe, there are those who might be struggling right now on where to draw lines. What lines? Where does a healthy pullback in economic activity that is all part of the Fed's plan cross over into something else? Something other than healthy? When does a pullback start to scare consumers, businesses, municipalities? All as we saunter into the historically worst month of the year. September.
Week of Macro
Tuesday, August 29
Consumer Confidence (August): Printed at 106.1, down from a downwardly revised 114, and well below expectations for about 116. To be honest, 106.1 might be the weakest print of the past three monthly results for this series, but the past three months have been the strongest three months for this series since last December.
That said, one absolutely jarring takeaway from the Conference Board's report was the measure for "current conditions," which printed at its lowest level since last November. On top of that, 17.2% of consumers described business conditions as "bad," up from July's 16.2%, as 40.3% of consumers said that jobs were "plentiful" down from 43.7% in July. The percentage of consumers describing jobs as "hard to get" increased from 11.3% to 14.1%. Not horrific. Certainly softer than had been expected.
JOLTS (Job Openings and Labor Turnover Survey) report (July): These results were significantly weaker than expected. Job openings printed at 8.827M down from 9.165M, well below the 9.4M to 9.5M that had been the consensus view. Yes, we know this number is inflated through multiple job listings in an effort to attract talent. Given that we understand this, as employers pull back on job openings, it stands to reason that any collapse in the headline print would appear to evolve rapidly.
In addition to job openings, actual hires are also in a state of decline. 167K fewer folks were hired in July than in June after 291K fewer individuals had been hired in June than in May. The hiring rate has now dropped to 3.7% from 4.1% for the year-ago comp. Fewer U.S.-based individuals were hired in July 2023 than for any single month since January 2021.
The "Quit Rate" also dropped in July. Higher quit rates are associated with broader confidence in labor market demand and expectations for either upward or at least ease of lateral mobility. 253K fewer individuals "quit" their jobs in July than in June, after 265K fewer individuals quit their jobs in June than in May. The quit rate has dropped to 2.3%, compared to 2.6% for the year ago period.
Wednesday, August 30
ADP Employment Report (August): Showed that private sector job creation had been softer than expected. This report ended a string of four consecutive months where the ADP report bested consensus view by more than 100K hires.
GDP Economic Growth (Q2): The BEA also revised the agency's second estimate for Q2 GDP down to growth of 2.1% (q/q, SAAR) from growth of 2.4% as a downward revision to business investment more than offset improved consumer spending.
Thursday 31 August
Personal Income and Spending (July): Personal Income grew 0.2% m/m in July, as Personal Spending rose 0.8%. This is the second straight month and third month in four that personal spending increased at an accelerated pace relative to personal income. Even more scary: After figuring for a number of factors that include inflation, real disposable personal income actually contracted for July, printing at -0.2%. There has been zero growth in real disposable personal income since May. That's two months.
What's even more scary than that, is what is happening to the savings rate. Personal savings as a percentage of disposable personal income printed at 3.5% in July, down from as high as 4.7% as recently as May. This is the weakest print for this particular item since last October. The pre-pandemic norm over a 20-year period had been about 6%.
PCE and Core PCE Prices (July): The all important PCE data showed July consumer-level inflation of 0.2% month over month at both the headline and the core. This was in line with consensus. On a year-over-year basis, headline PCE bounced off of June's 3.0% to 3.3%, as Core PCE edged up from June's 4.1% to 4.2%. This mild to moderate rekindling of inflation was basically due to the year-ago base comparison, and was not unexpected.
Just because the data reflects expectations does not mean that all is well and good. On a year-over-year basis, Goods prices are down 0.5%, after having been up 2.1% year over year as recently as April. However, prices for Services as of July, were 5.2% higher year over year, coming down from 5.4% in April, but up from 4.9% in June.
Friday, September 1
Employment Situation (August): For the month of August, the BLS Establishment Survey showed job creation of 187K, with downward revisions to both May and June totaling 110K. As a result, August job creation comes to a quite paltry net of only 77K filled positions. Interestingly, the Household Survey showed that 736K individuals either entered or re-entered the civilian labor force. While this survey shows 222K newly employed persons for August, it also shows 514K newly unemployed persons as participation soared.
This forced the unemployment rate (U-3) up from 3.5% to 3.8%. This also forced the Underemployment Rate (U-6) up to 7.1% from 6.7%. According to the data we have, the ranks of those employed part-time increased by 225K individuals. If job creation increased by a net 77K hires and part-timers made up 225K of those, the implication must be that the U.S. economy lost 148K full time jobs in August. Not job creation. Actual job destruction. Regardless of how the mainstream media tried to spin August as just another decent month.
In addition to forcing unemployment and increased underemployment, the increased participation also suppressed wage growth. Average hourly earnings increased 0.2% month over month, down from 0.4% in July and below expectations. Average hourly earnings also increased by 4.3% year over year, down from 4.4% in July.
Dollar Strength and Treasury Spreads
As the macro weakened and as Beijing started taking steps toward a looser monetary stance, the U.S. dollar strengthened. As a matter of fact, the U.S. dollar has been strengthening since mid-July.
The U.S. dollar gains on the Euro.
The U.S. dollar gains on the British pound.
For the past week, the S&P 500 gained a beefy 2.5%, after gaining just 0.18% on Friday. The S&P 500 closed last week up 17.61% year to date after being down 1.77% for the month of August. The Nasdaq Composite popped for a 3.25% run over the past five business days, after giving back just 0.02% on Friday. This puts the Nasdaq Composite up 34.06% for 2023 after having lost 2.17% in August. The higher tech, more narrowly focused Nasdaq 100 closed up 3.67% last week. That same Nasdaq 100 is now up an impressive 41.6% year to date, but did give back 1.62% for August. The Philadelphia Semiconductor Index was once again our leader last week. The index gained a robust 5.35% over the past week. after gaining just 0.32% on Friday. The "SOX" stands up 45.45% for the year, even after surrendering 4.94% in August.
That leaves us with the Russell 2000. The small caps actually gained 1.11% on Friday, and 3.63% for the week. The Russell 2000 now stands up 9.06% for 2023, but did take a 5.17% beating during the month of August. The KBW Bank Index turned things around and gained 2.91% last week including a nice 1.07% gain on Friday. The KBW is now off 18.33% this year, after being hit in the teeth for an incredible 8.17% in August.
Six of the eleven S&P sector-select SPDR ETFs shaded green this past Friday, reflecting an almost mixed session. However, nine of these sector funds shaded green for the week. For the week, Technology (XLK) easily led the way at +4.44%. Materials (XLB) gained 3.74% to finish in second place. Only the Utilities (XLU) and Staples (XLP) showed losses for the week.
The Week Ahead
Crickets. It should be quiet. That's pretty much what's ahead for this holiday-shortened work week. The earnings calendar is light. The Macro calendar is thin. Apple (AAPL) has a party scheduled mid-month, and that could work its way into this week's headlines, but the event is not on the docket for this week.
This will not be a busy week for the Fed, but at least a few central bankers have shown an interest in speaking publicly. On Wednesday morning I see that Boston Fed President Susan Collins is scheduled to speak. That afternoon, the Federal Reserve Bank will release the Beige Book in anticipation of the September 20 policy decision at 2 p.m. ET to be followed by an appearance about an hour later by Dallas Fed President Lorie Logan.
On Thursday, we'll hear from New York Fed President John Williams, and Fed Governor Michelle Bowman in the afternoon, to be followed in the zero-dark hours on Friday morning by Fed Governor Michael Barr.
As Sunday night melts into Monday morning, I see Fed Funds Futures trading in Chicago, pricing in a 93% probability for no rate change on September 20, and a 62% likelihood that the FOMC is done raising rates for this cycle. These markets are also pricing in a 59% probability that the Fed starts cutting rates by May 1, which would be the first of four 25 basis point rate cuts in 2024. I have my doubts.
This will be a much less active week than last, from a macroeconomic perspective. On Tuesday, we'll get July numbers for Factory Orders. On Wednesday, the headliner will be the ISM Service sector PMI of August. The rest of the planet has set a low hurdle. Thursday brings with it revisions to Q2 Unit Labor Costs and Non-Farm Productivity. Lastly, Wholesale Inventories will hit on Friday.
That's really all there is outside of the weekly data. We'll always have the Redbook, crude, gasoline, and natural gas inventories, as well as initial and continuing jobless claims. On top of that, every week, we see data for mortgage rates and applications as well as oil rigs in operation.
As far as events go, the main attraction will be the Goldman Sachs (GS) Communacopia Technology Conference to be held this Wednesday through Friday. Presentations will be given by Shopify (SHOP) , eBay (EBAY) , Etsy (ETSY) , Juniper Networks (JNPR) and Palo Alto Networks (PANW) among others.
On the earnings front, the cupboard is nearly bare, but we do have Zscaler (ZS) reporting on Tuesday (this) evening to be followed by ChargePoint (CHPT) , GameStop (GME) and UiPath (PATH) on Wednesday afternoon. DocuSign (DOCU) reports on Thursday afternoon and Kroger (KR) will close out the earnings for the week on Friday morning.
Economics (All Times Eastern)
10:00 - Factory Orders (Jul): Expecting -2.5% m/m, Last 2.3% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BRC) (0.93)