Strong jobs market
The content of this document is for information purposes only and is not to be used or considered to be an investment recommendation, or an offer or solicitation to buy, sell or subscribe to any securities or other financial instruments. It does not take into consideration the specific investment objectives, financial and fiscal situation or particular needs of the addressee. It reflects PNAA’s beliefs based on its own views of the direction of the global macroeconomic market, its investment process and other relevant factors.
Highlights
European energy
Right after European close on Friday, Russia announced that the Nord Stream gas pipeline would remain closed after its 3-day maintenance period and natural gas prices surged right after. Benchmark futures jumped as much as 35%. On the other side, gas storage levels are high and Europe increased imports from elsewhere. However, Europe’s politicians have been bracing for weeks for the halt and are now rushing to put emergency measures in place. Sweden and Finland created backstops over the weekend to help utilities struggling with collateral requirements in a bid to prevent a “Lehman” scenario. This Friday, EU energy ministers are set to discuss radical proposals to curb power prices, including gas-price caps and a suspension of power derivatives trading.
Market update
Strong jobs market
The S&P 500 closed the week at 3,924.26, -3.29% lower. The Dow Jones closed at 31,318.44, -2.99%, with the Nasdaq lower by -4.21%. The volatility index VIX closed the week at 25.47 down from 25.56. The Euro Stoxx 600 slipped -2.38%.
The 10-year UST closed at 3.19% up from 3.04% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +27bps. US Corporate Bond spreads: Investment Grade widened 8bps at 190bps and High Yield widened 41bps at 545bps. German 10-year Bunds yield closed at +1.53% up from +1.39% a week before. In Europe, Corporate Investment Grade spreads widened 13bps at 223bps and High Yield spreads widened 30bps at 625bps.
The US Dollar Index (DXY) appreciated +0.67% last week and closed at 109.53. The Euro closed at 0.9954 (-0.12% weekly); the Yen depreciated -1.86%, closing at 140.20 and the Swiss Franc depreciated -1.61%, closing at 0.9812. Gold closed at $1,712.19 depreciating -1.49%. Oil was down, Brent closed at $93.02 (-7.89%) and WTI at $86.87 (-6.65%).
Macroeconomy
Jobs report
Nonfarm payrolls increased 315k in August following a revised 526k advance in July. The unemployment rate unexpectedly rose to a six-month high of 3.7%, the first increase since January, as the participation rate climbed. Economists projected an almost 300k gain in payrolls and a 3.5% jobless rate. The labor force participation rate advanced to 62.4%, and the rate for workers ages 25-54 rose by the most since June 2020 to 82.8%. Job gains were led by professional and business services, health care and retail trade. Leisure and hospitality posted the smallest payrolls gain since a decline in December 2020. While a persistent mismatch between labor supply and demand has driven businesses to bid up wages, the report shows some signs that the two are coming more in line. Average hourly earnings rose 0.3% m-o-m and were up 5.2% y-o-y. The report also showed the average workweek down slightly to 34.5 hours.
Fed speakers
Minneapolis Federal Reserve Bank President Neel Kashkari mentioned: "I was actually pleased to see how well received Powell's speech at Jackson Hole was; people now understand the seriousness of our commitment to bring inflation back to 2 percent". New York Federal Reserve Bank President John Williams said that the central bank will likely need to drive interest rates above 3.5% to put downward pressure on inflation and drive demand to better levels relative to constrained supply. Lastly, Cleveland Fed President Loretta Mester, FOMC voting member, said she sees benchmark interest rates rising above 4% by early next year. She anticipates rate increases to slow economic growth, which she sees as running “well below 2%”.
Inflation in Europe
Euro area HICP inflation hit a new all-time high of 9.1% y-o-y in August, with the bigger surprise coming from core inflation which rose to 4.3%, above expectations. Both core goods and services inflation rose further suggesting that underlying inflation pressures continued to broaden. August Harmonized France CPI rose to +6.5% y-o-y, vs. estimates of a +6.7% rise and vs. +6.8% released one year prior. The monthly reading came in at +0.4%, vs. consensus at +0.6% and vs. +0.3% in July. Germany August CPI came in at +8.8% y-o-y, vs. +7.5% released in 2021. The monthly reading came in at +0.4%, vs. +0.8% released one month earlier. Eurozone July PPI +4.0% vs. +3.7% m-o-m expected. Inflation in Switzerland reached its highest level in over three decades with headline standing at 3.5%, while core level remained at 2% y-o-y. Inflation is still relatively low compared to other European countries, helped to a large extent by the strong Swiss franc, but it remains well above the 2% target of the Swiss National Bank (SNB).
PMIs
Manufacturing activity in the US slowed further in August and specifically, the manufacturing PMI fell to 51.5 points, slightly better than the prior reading of 51.3 points, but down from July's reading of 52.2 points; that's the lowest reading since July 2020. In Europe, the manufacturing PMI for the Eurozone fell to 49.6 in August from 49.8, sort of increasing the gap between the 50-point level that separates expansion and contraction in activity. This is the lowest reading since June 2020. Only three countries had manufacturing PMI readings above 50 points: The Netherlands at 52 points (a 22-month low), Ireland at 51.1 points (also a 22-month low) and France at 50.6 points (a two-month high).
China
The official manufacturing PMI rose slightly to 49.4 in August from 49.0. The alternative Caixin manufacturing PMI declined in August from 50.4 to 49.5, also suggesting that activity contracted last month. The official services PMI declined from 53.8 in July to 52.6 last month. Regarding Covid-19, as many as 103 cities in 26 provinces reported cases on Sept. 1, the most since early 2020. Local authorities are sticking to the Covid Zero strategy ordered by President Xi Jinping. Notably, Chengdu extended the lockdown of most of its 21 million residents. The sixth largest in city in China, it accounts for about 1.7% of GDP and is home to numerous automakers and technology companies.
What to watch
- Monday: US ISM manuf. index (Apr.)
- Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
- Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
- Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
- Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)