2024 Weekly Update

Market update

The S&P 500 closed the week at 5,634.61, +1.45% higher. The Dow Jones closed at 41,175.08, +1.27%, with the Nasdaq higher by +1.40%. The volatility index VIX closed the week at 15.86, up from 14.8. The Euro Stoxx 600 rose +1.31%.
The 10-year UST closed at 3.80%, down from 3.88% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -134bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 173bps and High Yield spreads narrowed -6bps at 354bps. German 10-year Bunds yield closed at +2.22% up from+2.25% a week before. In Europe, Corporate Investment Grade spreads narrowed -2bps at 129bps and High Yield narrowed -7bps at 361bps.

The US Dollar Index (DXY) depreciated -1.70% last week and closed at 100.72. The Euro closed at 1.1192 (+1.50%); the Yen appreciated +2.21%, closing at 144.37 and the Swiss Franc appreciated +2.10%, closing at 0.8479. Gold closed at $2,512.59, appreciating +0.18%. Oil was lower, Brent closed at $79.02 (-0.83%) and WTI at $74.83 (-2.37%).

Macroeconomy

US inflation

Jerome Powell laid the groundwork for the Federal Reserve’s next phase of monetary policy in his Jackson Hole speech. Powell sounded increasingly concerned about the outlook for labor and said the Fed doesn’t want to see the unemployment rate rise any further than it already has. While the war on inflation isn’t 100% won, Powell seems much more confident on prices returning to the 2% objective. He mentioned: “today, the labor market has cooled considerably from its formerly overheated state. The unemployment rate began to rise over a year ago and is now at 4.3% - still low by historical standards, but almost a full percentage point above its level in early 2023”. Powell said that rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn. Even so, the cooling in labor market conditions is unmistakable. In a nutshell, the upside risks to inflation have diminished, and the downside risks to employment have increased. He confirmed that the time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. Finally adding: “the current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions”.

FOMC minutes

The minutes of the July FOMC meeting solidified the prospects of a September cut. Several FOMC participants even “observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case” for a 25bps cut at the July meeting. And while the whole FOMC supported the decision to keep rates unchanged in the end, a “vast majority” saw a September rate cut as appropriate if data came in as expected. There was also a shift in the economic assessment, as most of the FOMC “remarked that the risks to the employment goal had increased” and “some participants also noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration”. We also heard from several Fed speakers. Atlanta's Fed Bostic said the Fed can't wait until inflation is back to 2% to begin cutting, noted inflation dashboard is "still flashing red," and that upcoming Fed action ranges from no cut to 50bps. Chicago's Goolsbee said everything the Fed has wanted to get rates down has happened. Boston Fed President Collins said that she didn’t see any “big red flags”, and Philadelphia Fed President Harker said that “I think a slow, methodical approach down is the right way to go”. Meanwhile, Kansas City Fed Schmid said that he wanted to see more data, saying that “Before we act - at least before I act, or recommend acting - I think we need to see a little bit more”. Lastly, Minneapolis Fed President Kashkari said that “the debate about potentially cutting rates in September is an appropriate one to have”, but he also said that "I'll probably be in the camp of, 'Hey, let's take a more measured approach because we don't know where our destination is going to be".

US employment

Some negative revisions to US payrolls were published. The preliminary estimate included an -818k downward revision to the March payrolls number. That means the monthly payroll numbers would be -68k lower assuming the revisions are spread evenly across the year. Before the revisions, nonfarm payrolls had been running at an average of +242k per month over the year to March, so a downward revision means the pace was +174k instead. The revisions are happening because each year, the payroll numbers are benchmarked against the Quarterly Census of Employment and Wages (QCEW) for March. At the last QCEW, employment growth through end 2023 was running at +1.5%, which was beneath the +2.0% y-o-y growth in nonfarm payrolls. So that points to a downward revision in the payroll numbers.

Global PMIs

The S&P Global survey's measure of new orders received by private businesses edged up to 52.3 from 52.2 in July. Its measure of prices paid by businesses for inputs was unchanged at 58.0, but the survey's gauge of prices charged slipped to 52.8 from 53.1 in July. Private sector employment fell, with a decline in the service sector accompanied by the manufacturing sector adding the fewest jobs since January. The survey's flash manufacturing PMI retreated to an 8-month low, falling to 48.0 this month from 49.6 in July. Its flash services PMI rose to 55.2, from 55.0 in July, compared to expectations at 54.0. In the US, flash Composite PMI Output Index edged down to 54.1 this month, a still healthy level among the highest measured over the past two years. That followed a final reading of 54.3 in July. The flash composite PMI for the Euro area increased by 1.1 points to 51.2 in August, surpassing consensus expectations. The positive surprise was primarily driven by France, where the index rose by 3.6 points to 52.7. The Paris Olympics contributed to increased confidence and activity in France. Excluding this, the PMI showed a slight rebound in August, thanks to peripheral countries.

Highlights

On rates

Treasury rates ended the week lower as Fed Chair Powell cemented expectations for an interest rate cut next month. After his Jackson Hole speech on Friday, Fed-sensitive 2-year yields tumbled 9bps to 3.90% while 10-year yields slipped 5bps to 3.80%. Absent a complete collapse in growth, it now seems likely 10-year yields will soon be higher than 2-year yields. Fed expectations didn’t reprice too aggressively. The market is now pricing in 34bps worth of cuts for the Sept. 18 FOMC meeting and 103bps for the year.

Earnings

With most of the S&P having already reported earnings, only 11 companies will be posing their results this week. These include Salesforce, Crowdstrike, Best Buy, HP, Lululemon, Ulta and more importantly Nvidia after the close Wednesday. Because the chipmaker has been a key driver of the broader market, results will be under heavy scrutiny. For Q2, investors expect EPS to rise +138% to 64c and sales of $28.7B (+112%). Gross margins and operating margins are expected to be 75.5% and 65.7% respectively.

M&A activity

M&A activity has picked up as companies try to protect their growth algorithm, build scale and strengthen their profitability profile in a time of slowing consumer demand. The latest deals include Couche-Tard’s bid for 7-Eleven’s parent company, Mars’s purchase of Kellanova in cash valued at $30Bn, and Carlsberg’s takeover of UK soft drinks company Britvic.

What to watch

• Monday: Germany IFO index (Aug.); US durable goods orders (July)
• Tuesday: US conference board consumer confidence (Aug.)
• Wednesday: Eurozone M3 and credit data (July)
• Thursday: Spain, Germany flash CPI (Aug.); US real GDP (Q2, second release), Initial jobless claims
• Friday: Japan Tokyo CPI (Aug.); France, Italy flash CPI (Aug.); Euro area flash HICP (Aug.); US core PCE (July), UoM survey (Aug.)