Summary:
Last Week Review
• WAVE OF WEAKNESS IN US EMPLOYMENT IS A CLASSIC PRE-RECESSION PATTERN. Fears that the symptoms of US labor tightness when they emerged in the July report (which led to the sell-off in early Aug) were the start of the next wave of weakness, proved to be indeed followed by the August US Payroll numbers. JOLTS JOB OPENINGS (Jul), ADP NONFARM EMPLOYMENT CHANGE (Aug) & NONFARM PAYROLLS (Aug) all three spawned smaller-than-expected figures.
• On the one hand, Manufacturing and Services PMI (Aug) data released by both S&P Global and the Institute of Supply Management (ISM) both imply the same thing; that the Manufacturing sector is stumbling in contractionary territory, while the Services sector is healthier in expansionary territory. One somewhat relieving piece of labor data explained that the Unemployment Rate was fairly stable at 4.2% in Aug, down from 4.3% from the previous month; mainly because the weekly Initial Jobless Claims stated that fewer people filed unemployment claims for the week ending Aug 31st. Also seen was the growth in hourly wages in August which rose dramatically by 0.4% mom, compared to minus 0.1% in the previous month.
• This uncertainty regarding the health of the US economy inevitably trickled down to the markets, adding tension to an already volatile period, where investors are grappling with the Federal Reserve’s changing MONETARY POLICY, a tight US ELECTION, and concerns over already overvalued STOCK VALUATIONS. Evidence of declining risk appetite was seen across the market. The S&P 500 fell 1.7% on Friday and has lost almost 4.3% over the past week, the worst weekly decline since March 2023.
• Nvidia shares, which have come to symbolize the euphoria around artificial intelligence this year, fell more than 4% and are at their lowest level in about a month, falling alongside other Tech sector stocks. Meanwhile, the CBOE Market Volatility Index, also called Wall Street’s “fear gauge,” hit its highest level in nearly a month on Friday.
• MARKET SENTIMENT: THE FED is expected to cut interest rates at its September 17-18 meeting, but the aforementioned data sparked concerns that months of high borrowing costs have started to put pressure on the economy, although it must be admitted that the US is still on a soft-landing path. This has led analysts to slightly push for a Fed rate cut of a higher magnitude of 50bps, where the percentage chance is now around 50-50 with a projected 25bps cut. Concerns about STOCK VALUATION have also resurfaced. The S&P 500, which is up more than 13% this year, is trading at a P/E ratio of almost 21 times, well above its historical average of 15.7, according to LSEG Datastream.
• Despite the recent sell-off, the S&P 500 Technology sector trades at a P/E ratio of over 28 times, compared to its long-term average of 21.2. Investors are also keeping a close eye on the US ELECTION which is beginning to enter its final stages. The battle between Democrat Kamala Harris and Republican Donald Trump was quite even, with Harris even taking a slight lead over Trump.
• COMMODITIES: Weak US labor data sent OIL prices plunging. Over the past week, BRENT slumped 10%, while US WTI fell about 8%. US government data showed employment increased less than expected in August, but a drop in the unemployment rate to 4.2% suggests an orderly slowdown in the labor market may not warrant an overly aggressive interest rate cut from this month’s FOMC MEETING. Concerns around SLACK DEMAND from CHINA also continued to pressure oil prices. On Thursday, Brent closed at its lowest level since June 2023 despite a much larger-than-expected reduction in US oil inventories and OPEC+’s decision to postpone a planned increase in oil production.
• US crude stockpiles fell by 6.9 million barrels to 418.3 million barrels last week, compared with a projected decline of 993,000 barrels in a Reuters poll of analysts. Signals that warring factions in LIBYA are increasingly seeking a deal to end a dispute that has disrupted the country’s crude exports also depressed oil prices last week. Most exports are still closed but some loads have gone into storage.
This Week’s Outlook
• From the ASIA region, JAPAN has started the week with the release of 2Q GDP data which turned out to be below expectations, contracting 0.1% from the previous quarter and coming in at 0.7% qoq. More CPI & GDP figures from GERMANY & UK will color the EUROPEAN bourse this week, as we await the European Central Bank’s decision on interest rates which is expected to see another 25bps cut on Thursday, bringing it down to 4.00%.
• Meanwhile in the US mainland, it is the CPI figure that will shape the Federal Reserve’s final decision (on the amount of rate cut to be imposed) before next week’s FOMC Meeting. CPI & CORE CPI (Aug) are expected to cool towards the Fed’s 2% Target, not to mention PPI which will also follow on Thursday.
• INDONESIA: The nation awaits the release of Consumer Confidence (Aug) early in the week, followed by Retail Sales (Jul) on Tuesday, and Motor & Auto Sales (Aug) figures on Wednesday.
• THE US ELECTION could attract more investor attention on Tuesday, when the two candidates debate for the first time ahead of the vote on November 5.
• So far, market turmoil has reinforced September’s reputation as a difficult time for investors, and it’s not unlikely that there will be more market volatility ahead.
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