Market Recap 9/1/2023

Most asset prices corrected in August with all of the main equity indexes losing ground.  Bonds were more of a mixed bag, with short-term bonds gaining a bit while longer-term bonds dipped.   But none of the moves were particularly dramatic.  Investors remain fixated on the outlook for inflation and the economy and what it means for monetary policy going forward.   News this week contributed to the growing view that growth is slowing, inflation is sticky, and central banks remain a wildcard.


Softening Labor Market Trends


The biggest report of the week was Friday’s payrolls number.  Employment increased by 187,000 in August, modestly faster than expected.  But both the June and July numbers were revised lower by a total of 110K.  Over the last three months, 150,000 jobs per month have been added, down from a 238,000 average between March through May.  The labor market is clearly softening, but is far from soft.



It’s notable that the unemployment rate ticked higher by three tenths to 3.8% due to more people entering the labor market.  Meanwhile, average hourly earnings increased only 0.2% last month, the lowest sequential increase since February 2022.  Wages are up 4.3% year-over-year, the lowest rate of change since July 2021.




Another sign of a softening in the labor market was the fact that job openings in July dropped to their lowest level in more than two years.



Not a bad set of data really.  Slower growth but certainly not worrisome at this point.


Inflation Remains Sticky


Inflation is proving more of a vexing issue.  This week’s personal consumption expenditures index (PCE) showed that prices increased a mild 0.2% in July, right in line with forecasts.  Prices are up 3.3% year-over-year, a modest increase from June’s number of 3%.



Core inflation, with strips out food and energy, remains stuck above 4% on an annual rate of change basis.  As we’ve noted a number of times over the last few months, the trajectory for inflation in the coming months is going to hinge on housing and energy costs.  So far falling rents haven’t filtered through into the inflation data and energy costs are on the rise again.  There is a growing risk that inflation isn’t going to hit the Fed’s target this year.  


What’s it mean for policy expectations?  The betting is that the Fed is done raising rates this year, as you can see below.




But if headline inflation is still running above 4% by year-end will expectations for rates in 2024 shift higher?  This is likely to be the dominant story for the final quarter of the year.  


(Other) Charts We Found Interesting


  1. While headline inflation in the U.S. seems stuck around 3%, the comparable number in Europe is 5%.  Combine this with notable economic weakness in certain regions, and stagflation seems to be the order of the day.



  1. The mortgage payment required to buy the average home in the U.S. has almost doubled since 2020. 



  1. Not only is it more expensive to buy a home, there are also fewer to buy.  Active listings of homes for sale in the US fell 19.5% over the last year to the lowest level since 2012 (when this data series began).



  1. The spread between 10-year Treasury yields and mortgage rates is as wide as it has ever been. 




  1. Japan outperformed the US by over 90x during the period from 1950 to the peak in 1988.  Since then Japanese stocks have given back almost all of the relative returns.  It’s hard to time these trends, but one thing is for sure, then can go on for much longer than people expect.  



  1. Political polarization in graphic form.  



  1. You have to go back to the middle-ages to find England covered with as much woodland as it is now.



  1. This is all the more remarkable given population trends over this period.



Have a good weekend


Charles Blankley
Chief Investment Officer
Gemmer Asset Management LLC


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