2024 Weekly Update

Market update

The S&P 500 closed the week at 5408.42, -4.25% lower. The Dow Jones closed at 40345.41, -2.93%, with the Nasdaq lower by -5.77%. The volatility index VIX closed the week at 22.38, up from 15. The Euro Stoxx 600 fell -3.52%.

The 10-year UST closed at 3.71%, down from 3.9% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -136 bps. US Corporate Bond spreads: Investment Grade spreads widened +4bps at 178bps and High Yield spreads widened +8bps at 360bps. German 10-year Bunds yield closed at +2.17% up from+2.30% a week before. In Europe, Corporate Investment Grade spreads widened +2bps at 131bps and High Yield widened +14bps at 370bps.

The US Dollar Index (DXY) depreciated -0.51% last week and closed at 101.18. The Euro closed at 1.1084 (+0.33%); the Yen appreciated +2.65%, closing at 142.3 and the Swiss Franc appreciated +0.78%, closing at 0.843. Gold closed at $2497.41, depreciating -0.24%. Oil was lower, Brent closed at $71.06 (-9.82%) and WTI at $67.67 (-7.99%).

Macroeconomy

Jobs report

In a nutshell, the Aug. jobs report was not as bad as expected however, still pretty soft, due to a low Establishment survey number and large negative revisions to June and July. The Establishment survey showed +142k job additions in Aug., below the forecast of 165k but up from 89k in July. Employment growth in Aug. was in line with average job growth in recent months but was below the average monthly gain of 202k over the prior 12 months. Private payrolls gained 118k, below the 140k forecast but up from 74k in July and higher than ADP’s 99k number. Areas of payroll strength included construction (+34k), financial activities (+11k), private education and health services (+47k), leisure and hospitality (+46k), and government (+24k). Manufacturing jobs were quite soft, after 24k shed in Aug. (which is down from +6k in July and below the -2k forecast). Revisions were negative for the Establishment survey, with ~86k cut from what was previously reported for June and July. The Household survey revealed a 168k increase in the number of employed people in Aug., higher than the 142k Establishment survey figure. The unemployment rate ticked down to 4.2%, in line with expectations (the number was 4.3% in July). The participation rate was flat m-o-m at 62.7% and in line with expectations. Hourly wage growth was a bit firmer than anticipated at +0.4% m-o-m (vs. the +0.3% forecast) and +3.8% y-o-y (up from +3.6% in July and higher than the +3.7% forecast). Average weekly earnings rose 3.5% y-o-y, about 30bps lower than the hourly wage rate. The workweek length widened modestly to 34.3 hours in Aug. (up from 34.2 hours in Jul and in line with expectations).

Fedspeak

Fed Governor Christopher J. Waller gave a quite dovish speech, in the same lines as Chair Powell at Jackson Hole, with the Fed pivoting in response to the cooling in employment and inflation. Importantly, Waller doesn’t think the economy is in or imminently headed for a recession, although it looks like markets are increasingly concerned about this possibility. The highlights from the speech are the following: in light of the considerable and ongoing progress toward the Federal Open Market Committee's 2% inflation goal, I believe that the balance of risks has shifted toward the employment side of our dual mandate, and that monetary policy needs to adjust accordingly; the August report along with other recent labor data tend to confirm that there has been a continued moderation in the labor market; the current batch of data no longer requires patience, it requires action; maintaining the economy's forward momentum means that, as Chair Powell said recently, the time has come to begin reducing the target range for the federal funds rate; I do not expect this first cut to be the last. With inflation and employment near our longer-run goals and the labor market moderating, it is likely that a series of reductions will be appropriate; and, if the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings. If data suggests the need for larger cuts, then I will support that as well. I was a big advocate of front-loading hikes when inflation accelerated in 2022, and I will be an advocate of front-loading cuts if that is appropriate.

US data

The economic data releases were mixed. No data pointed to a sharp downturn but releases showed the economy is at a crucial inflection point. In employment, weekly initial jobless claims fell to 227k (vs. 230k expected) over the week ending Aug. 30, an 8-week low. That pushed the 4-week moving average down to 230k, a 12-week low (four weeks earlier, the 4-week moving average stood at 241k). On the negative side, the Aug. ADP’s report of private payrolls fell to just 99k (vs. 145k expected). That’s the lowest it’s been since January 2021, and it was also a 5th consecutive monthly decline for that measure. Also, US JOLTS report of job openings showed the number of job openings falling to a three-and-a-half year low of 7.673m in July (vs. 8.1m expected). The ratio of job openings per unemployed individuals fell back to 1.07, beneath its pre-Covid levels in 2019. In terms of economic activity, the ISM services index remained in the expansionary territory in August at 51.5 (vs. 51.4 expected). However, the Aug. ISM manufacturing came in beneath expectations at 47.2 (vs. 47.5 expected), which was only a modest pickup from the disappointing July reading. The new orders subcomponent fell to its lowest since May 2023, at 44.6. The employment subcomponent did pick up from a 4-year low of 43.4 last month to 46.0 but this is still low, and the 17th month below 50 in the last 20 months.

Highlights

On rates

There were some very volatile moves after the jobs report, but Treasury yields ultimately closed at their lowest levels in over a year for the most part. For instance, the 2yr Treasury yield was down -27.1bps over the week to 3.65%, which is its lowest closing level since September 2022. Similarly, the 10yr Treasury yield fell -19.4bps last week to 3.71%, the lowest closing level since June 2023. With the sizeable steepening on Friday, the 2s10s curve ended the week in positive territory at +6bps, ending its longest period of inversion that had lasted since July 2022. Breakevens accounted for most of the decline in yields, with 2yr breakevens -17.4bps lower on the week to 1.49%, their lowest since November 2020. Those rates moves came as markets dialed up the amount of rate cuts priced by December from 100bps to 115bps over the week. Over in Europe, there were similar if more moderate moves on the rates side, and the 10yr bund yield ended the week down -12.8bps at 2.17%. That is its lowest closing level since February, and the moves came as investors also grew more confident that the ECB would dial up the pace of their rate cuts over the year ahead. In fact, the amount of rate cuts priced by the June 2025 meeting went up from 133bps a week ago, to 151bps by the close on Friday. So almost an extra 25bps cut was priced in.

M&A

Verizon Communications announced a deal to acquire Frontier Communications in an all-cash transaction valued at $20B. "This strategic acquisition of the largest pure-play fiber internet provider in the U.S. will significantly expand Verizon's fiber footprint across the nation," according to a press release. The Biden administration reportedly concluded that the nearly $15Bn sale of U.S. Steel to Nippon Steel would pose a national security risk that can't be mitigated by either company. U.S. Steel outlined that it would "pursue all possible options under the law to ensure this transaction closes". Lastly, Seven & i, the Japanese owner of 7-Eleven stores, rejected a $39Bn takeover offer by Canadian firm Alimentation Couche-Tard after deeming it too low. Couche-Tard, which operates Circle K convenience stores, offered to acquire Seven & i for $14.86 per share in cash, in a transaction that would have made it the largest-ever Japanese target of a foreign buyout.

What to watch

• Monday: China PPI and CPI (Aug.), Money and financing aggregates (Aug.); Japan GDP (Q2)
• Tuesday: China trade balance (Aug.); UK employment and wages (July); US Trump - Harris debate
• Wednesday: UK monthly GDP and IP (July); US CPI (Aug.)
• Thursday: Eurozone ECB decision (Sept.); US initial jobless claims
• Friday: US U. of Michigan survey (Sept.)