Markets Blog
David Matzko, LPL Research
U.S. stocks kicked off the seasonally weak month of September on a down note, led down by the technology sector as some of the artificial intelligence (AI) tech trades unwound. International equities were not immune and suffered similar declines. The broad bond market rose (and U.S. Treasury yields fell) on soft jobs data. 2-year Treasury yield fell below the 10-year to fully dis-invert the yield curve for the first time since July of 2022.
Index Performance
U.S. and International Equities
U.S. Equities: U.S. stocks kicked off September on a down note as the month has so far lived up to its reputation as a difficult one for markets. Perhaps the selling was some a self-fulfilling prophecy, as September’s track record is well known, but certainly some of it reflected the ongoing debate about whether a soft landing will be achieved. The S&P 500 fell about 4% for the week (as of 3pm ET), with a sizable chunk of the decline coming Friday after the August payroll employment report slightly missed expectations. Earlier in the week, mixed economic data including soft ISM manufacturing and ADP private payrolls reports caused added to concerns about a pronounced economic slowdown. Weakness in the broad averages was concentrated in technology, in particular semiconductors, as some AI enthusiasm unwound, exacerbated by a disappointing outlook from Broadcom (AVGO). Energy was another underperformer as crude oil prices fell sharply.
International Equities: International equities suffered a similar fate as their U.S. counterparts this week with outsized declines. Part of the weakness was sympathy with U.S. markets and a spillover of the AI weakness, but weak German economic data and hawkish comments from Bank of Japan officials did not help. Softening data in Europe firmed expectations for another rate cut from the European Central Bank (ECB) next week. The STOXX Europe 600 Index fell more than 3% for the week in euro currency. Japan’s Nikkei 225 tumbled nearly 6% in yen (though losses were closer to 3% in U.S. dollars), and the Shanghai Composite fell 2.7%. Overall, the U.S. dollar-based MSCI EAFE and MSCI Emerging Markets (EM) indexes fell slightly less than broad U.S. equities.
Fixed Income: The Bloomberg Aggregate Bond Index was higher on the week as U.S. Treasury yields fell across the curve, especially after Friday’s weaker-than-expected jobs report. Shorter maturity yields led the rally, with 2-year through 5-year Treasury yields lower by 0.20% to 0.25% during the week. Moreover, after being inverted since July 2022, the “bull steepening” has pushed the monetary policy-sensitive 2-year yield below the 10-year to fully dis-invert the yield curve. Investment grade corporate credit spreads were modestly higher on the week but remain below the early August highs.
At the recent Jackson Hole Economic Summit, Federal Reserve Chair Jerome Powell was clear in his commentary that the risks are now balanced between inflation and employment. Perhaps the most critical statement in his speech was that the Federal Open Market Committee (FOMC) members “do not seek or welcome further cooling in labor market conditions.” It’s uncertain if Friday’s job report meets the criteria for further cooling per se, but the aggressive rate cuts that were priced into the market stuck after the report. Markets are pricing in over 1.0% of cuts this year and nearly 2.5% of cuts over the next year. With the next Fed meeting still two weeks away, we expect rate volatility to stay elevated and recommend investors use any back-up in yields to add to high-quality fixed income as the path for rates is seemingly lower.
Commodities and Currencies: Commodity markets declined this week as weakness in energy markets offset strength in the metals complex. Cooling labor market data and disappointing manufacturing activity stoked slowing growth concerns. West Texas Intermediate (WTI) stumbled around 8% despite OPEC+’s decision to pause a planned output hike for two months. Technically, WTI has now violated support at $71.50 and appears poised to retest the December lows near $67.71. Natural gas was a bright spot in the energy patch as forecasts for above-average temps supported the demand outlook. Futures rallied around 7% on the news. Metals traded higher with precious metals outperforming. Gold added 3.4% as the dollar declined and Treasury yields tumbled — not to mention safe-haven buying as stocks fell throughout the week. Currency volatility also picked up this week as the yen strengthened. Hawkish commentary from Bank of Japan (BOJ) officials coupled with rising rate-cut expectations in the U.S. drove the dollar/yen down 2.5% and close to support off the August lows (141). The greenback pared some intraweek losses after finding support near the December lows but still ended down 0.4%.
Economic Weekly Roundup
Key Takeaways from the August Employment Data: The job market is exhibiting signs of cooling. While businesses continue to add jobs, the pace of hiring has moderated compared to earlier this year, as evidenced by the downward revision of July's employment estimate to 89,000. Additionally, the number of individuals working part-time due to economic reasons has increased significantly, surpassing pre-pandemic levels. The persistence of high levels of multiple-job holding and the decline in temporary employment further underscore the weakening labor market conditions. In light of these developments, markets are anticipating a more aggressive interest rate cut by the Federal Reserve at its upcoming meeting. While the consensus stance leans towards a 25 basis point reduction, there is a growing expectation that the central bank might opt for a larger 50 basis point cut. However, our analysis suggests that a 25 basis point reduction is more likely, with the Fed reserving the option to implement more substantial cuts in the latter part of the year.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Wholesale Inventories (July Final), NY Fed 1-Year Inflation Expectations (August), Consumer Credit (July)
Tuesday: NFIB Small Business Optimism (AugustWednesday: MBA Mortgage Applications (September 6), CPI (August)
Thursday: PPI (August), Initial Claims (September 7), Monthly Budget Statement (August)
Friday: Import Price Index (August), Export Price Index (August), University of Michigan Sentiment (September Preliminary)
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