Week in Review
Market gyrations this week illustrated how short-term market movements are being held hostage by the trade headlines. So called news like the headline below was enough to push stocks higher and bond prices lower for the week.
Not sure what makes them reliable, but regardless it does appear that trade negotiations will resume on October 5th for what that is worth. But we have been trapped in this cycle for a while. Markets embrace news that talks are starting only to be sideswiped by a ratcheting up in the tensions. The graphic below highlights this.
Will the Jobs Market Follow Manufacturing or Services?
In terms of economic data there was something for everyone.
The ISM manufacturing index indicated contracted last month. The PMI was at 49.1% in August, down from 51.2% in July. The employment index was at 47.4%, down from 51.7% last month, and the new orders index was at 47.2%, down from 50.8%. Anything below 50 indicates contraction.
Growth in Services
The August ISM Non-manufacturing index (another way of saying the service sector) was at 56.4%, up from 53.7% in July. The employment index decreased to 53.1%, from 56.2%. Again, anything above 50 indicates expansion, below 50 contraction.
Slowing Jobs Growth
Today’s payrolls report was underwhelming. The headline number came in at +105K if you strip out hiring for census workers, well below consensus expectations of 158K. The previous two months were revised down 20K combined. The unemployment rate was unchanged at 3.7%.
So, the pertinent question is whether the contraction in manufacturing will bleed over into the job market and lead to higher unemployment. It certainly could, but we also shouldn’t lose sight of the fact that services are much more important from a jobs perspective. As you can see below, roughly 84% of employment is made up of service jobs.
We certainly could see higher unemployment due to manufacturing, but the hurdle is much higher than it was 20 years ago because manufacturing is so much smaller in the U.S.
Will September Be All About Policy Actions?
As we move into September the market’s focus will likely shift from how the global economy is doing to policy makers around the world. How will they react to the slump in manufacturing and falling inflation expectations?
Things kicked off this week in China. The central bank there cut the amount of cash banks must hold as reserves to the lowest level since 2007. This will serve to inject 900 billion yuan or $126 billion of liquidity into the economy.
Along the same lines both the Chilean and Russian central banks cut interest rates. The list of central banks whose last move was a rate cut grows longer (look at all the green).
Next Thursday the European Central Bank meets, and renewed stimulus is likely. Another cut in rates is possible as is a resumption in bond purchases.
Then on September 17th and 18th the Fed meets. A quarter point cut is all but a done deal. A half-point cut looks unlikely. Really the key focus will be on how they portray their approach going forward. Will they say they will provide all the accommodation necessary to offset the drag from trade, or will they take a more hawkish posture? For what it is worth J.P Morgan was out today predicting quarter point cuts in September, October, and December.
Summed Up in a Single Picture
When thinking about the mess that UK politics has become, Marx’s oft quoted passage that “history repeats itself, first as tragedy, then as farce” seems appropriate. Marx was referring respectively to Napoleon I and his nephew Louis Napoleon III. Today Theresa May would fill the role of tragedy, Boris that of farce.
But maybe there is another candidate? As MPs geared up to defeat Boris Johnson in a momentous vote earlier in the week, one parliamentarian in particular seemed less than bothered. Jacob Rees-Mogg decided to honor the moment by reclining on the government’s front bench.
Oh, yea, he’s the leader of the House of Commons. Naturally this elicited a howl of abuse from the opposing bench, but more importantly, seemed to capture the mood. Is Nero fiddling while Rome burns?
Or maybe British politics as a whole has devolved into a farce. Probably my favorite example of this is the fact there’s a chance the Tory’s might actually hold a vote of no confidence in themselves. This would bring down the government and lead to an election, because, you know, they have no confidence in themselves. But then again, they have no confidence in themselves because they have confidence they would win the resulting election. You can’t make this stuff up!
Have a good weekend.
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