MARKET UPDATE: ISM MANUFACTURING AND SERVICES, US JOB OPENINGS, ADP EMPLOYMENT REPORT, US EMPLOYMENT REPORT

What We Are Watching This Week

• Consumer Credit
• Consumer Price Index
• Producer Price Index

Highlights From Last Week

• ISM Manufacturing and Services
• US Job Openings
• ADP Employment Report
• US Employment report

A late rally enabled large-cap stocks to secure their fourth consecutive weekly gain despite tensions in the Middle East. Concerns over a broader Middle East conflict pushed oil prices to a one-month high, benefiting energy stocks but negatively impacting cruise lines and the consumer discretionary sector. Early in the week, trading was quiet but picked up after reports of a potential retaliatory missile attack by Iran on Israel. On Tuesday, Iran fired nearly 200 missiles at Israel, with some hits reported in southern and central parts of the country. This news led to a sharp stock pullback, with the S&P 500 falling 1.38%. Markets stabilized on Wednesday as worst-case scenarios did not materialize.

Toronto investors were buoyed by positive news from the U.S., where stronger-than-expected job numbers lifted markets on Friday. The TSX Composite Index surged by 194.33 points to close at 24,162.83, gaining 109 points in the week. The Canadian dollar edged down by 0.14 cents to 73.67 cents U.S. Economically, the IVEY PMI survey for September improved to 53.1 from August’s 48.2, with readings above 50 signaling increased activity.

The pan-European STOXX Europe 600 Index fell 1.80% in local currency terms, with escalating Middle East conflicts making investors more cautious. Major European indexes also experienced sharp declines: Italy’s FTSE MIB dropped 3.26%, France’s CAC 40 fell 3.21%, Germany’s DAX lost 1.81%, and the U.K.’s FTSE 100 slipped 0.48%. Comments from European Central Bank (ECB) officials suggest a potential shift towards easing monetary policy. ECB President Christine Lagarde indicated that borrowing costs might be lowered soon, stating that recent developments strengthen confidence in inflation returning to target levels. Executive Board member Isabel Schnabel also suggested that inflation will likely return to the 2% target and omitted her usual caution against cutting rates too early.

On Tuesday, the Institute for Supply Management (ISM) reported that its manufacturing PMI, a key gauge of U.S. manufacturing activity, remained steady at 47.2 in September. This marks the sixth consecutive month below the 50 threshold, indicating a continued contraction in the sector. Economists surveyed by The Wall Street Journal had expected the index to rise slightly to 47.5%. Key details reveal that only five out of thirteen industries reported growth in September. The primary weakness came from a decline in inventories. On a more positive note, the index for new orders increased by 1.5 points to 46.1, while the production barometer rose 5 points to 49.8%. However, the employment gauge fell 2.1 points to 43.9% as firms adjusted their workforce to align with demand levels. For the first time this year, the prices index indicated declining prices. The ISM index highlights the struggle in the manufacturing sector. The index has been in contraction territory for 22 of the last 23 months. Uncertainty over regulatory, fiscal, and trade policy hinders activity, a trend likely to persist into 2025. A recent half-point interest rate cut by the Federal Reserve may offer some relief, but its impact is expected only when new projects commence in the first quarter.¹

In a separate report, the ISM reported that the services sector of the U.S. economy grew in September at its fastest pace in a year and a half, according to a new survey, suggesting the country faces no imminent recession risk. The Institute for Supply Management (ISM) reported that its index of service businesses rose to 54.9% in September, up from 51.5% in August. This marks the highest level since February 2023. A reading above 50% indicates expansion and is a positive economic sign.

Breaking down the details:

• The new-orders index surged by 6.4 points to 59.4%, the highest since early 2023.
• The production gauge increased by 6.6 points to 59.9%.
• However, the employment barometer fell 2.1 points to 48.1%, indicating a “low hiring” environment.
• The prices-paid index, reflecting inflation, climbed 2.1 points to 59.4%, suggesting that high supply costs remain challenging.

The services sector has been a driving force behind economic growth over the past few years, continuing to support the economy despite high interest rates and a recent surge in inflation. The annual inflation rate has nearly returned to its pre-pandemic low, and the Federal Reserve has started to lower interest rates. Lower borrowing costs have the potential to boost sales, promote hiring, and further stimulate the economy. Business executives are cautiously optimistic that the economy will improve now that the Federal Reserve is cutting interest rates. However, concerns remain about the upcoming U.S. election. There is concern over the economy, and many people are waiting to see which way the election goes in November before making solid plans for 2025 and beyond. Economists polled by The Wall Street Journal had expected a reading of 51.8%. ²

On Tuesday, the U.S.  Labor Department reported that workers are quitting at the slowest rate since the pandemic, signaling a cooling U.S. labor market as hiring slows and jobs become harder to find. In August, the number of quits fell to 3.1 million—the lowest in four years—and the quit rate dropped to 1.9%, below pre-pandemic levels. The hiring rate also fell to 3.3%, the lowest in 11 years (excluding the pandemic). Job openings in August increased to 8 million from 7.7 million in July, but they remain one-third lower than the 2022 peak of 12.2 million. Most new openings were in construction and state/local government, while other industries saw flat or declining postings. With hiring slowing and unemployment rising to 4.2%, the Federal Reserve has shifted its focus from inflation to labor market stability, recently lowering interest rates for the first time in four years. Although a cooler labor market could help control future inflation, the Fed aims to prevent further weakening to avoid recession risks. Despite the slowdown, layoffs remain very low, with the rate slightly decreasing to 1.0% in August, near record lows.³

U.S. businesses added 143,000 new jobs in September, according to ADP, exceeding forecasts but marking the sixth consecutive month of employment gains below 200,000, indicating a cooling labor market. This slowdown has shifted the Federal Reserve’s focus from inflation to labor stability, leading to recent interest rate cuts to prevent further market deterioration. Average wage growth for job stayers was 4.7%, while job switchers saw pay increases slow to 6.6% from 7.3%. Most new jobs in September were in construction, leisure, hospitality, and health care. Revised August figures showed 103,000 new jobs, the smallest increase in over three and a half years. The ADP report covers private-sector hiring, while the Bureau of Labor Statistics (BLS) report includes government jobs, with economists expecting 150,000 new jobs in September from BLS. Overall, the once-hot labor market, where workers had strong wage growth and leverage, has cooled, with quitting rates at an 11-year low (excluding the pandemic period). Significant hiring acceleration is likely when further Fed interest rate cuts lower borrowing costs.⁴

For the week ending September 28, U.S. initial jobless claims rose to a seasonally adjusted 225,000, up 6,000 from the revised 219,000 claims from the previous week. The 4-week moving average of claims decreased slightly to 224,250. Meanwhile, the total number of continued claims across all benefit programs for the week ending September 14 was 1,651,691, a decline of 41,454 from the previous week. In comparison, there were 1,612,148 continued claims in the same week in 2023.⁵

In August, new orders for U.S. manufactured goods decreased by $1.3 billion, or 0.2%, to $590.4 billion, marking a decline in three of the last four months, according to the U.S. Census Bureau. This comes after a 4.9% increase in July. Shipments also fell by $3.1 billion, or 0.5%, to $590.1 billion, following a 0.8% rise in July. Unfilled orders continued their upward trend, increasing by $5.0 billion, or 0.4%, to $1,391.4 billion—up for the forty-eighth time in forty-nine months. The unfilled orders-to-shipments ratio rose to 6.87 from 6.76 in July. Inventories, which have increased in six of the last seven months, rose by $1.2 billion, or 0.1%, to $860.2 billion. The inventories-to-shipments ratio also edged up to 1.46 from 1.45 in July.⁶

The U.S. economy added a robust 254,000 new jobs in September, indicating that the labor market remains strong and supporting the Federal Reserve’s cautious approach to lowering interest rates. This largest increase since March significantly exceeded Wall Street’s expectations, with economists predicting only a 150,000 rise after seasonal adjustments. Additionally, hiring figures for August and September were revised upward. The unemployment rate dipped to 4.1% from 4.2%, suggesting continued stability in the job market. This marks the second consecutive monthly decline from a peak not seen in over three years. In September, average hourly earnings for all private nonfarm employees rose by 13 cents (0.4%) to $35.36, marking a 4.0% increase over the past year. Earnings for private-sector production and nonsupervisory employees grew by 8 cents (0.3%) to $30.33. The average workweek for all private nonfarm employees slightly decreased by 0.1 hour to 34.2 hours. In manufacturing, the workweek remained unchanged at 40.0 hours, while overtime decreased by 0.1 to 2.9 hours. The workweek for production and nonsupervisory employees stayed steady at 33.7 hours. The strong jobs report will likely encourage the Fed to maintain its gradual approach to interest rate cuts rather than pursuing a more aggressive path. If the economy continues to strengthen, it could even lead to reevaluating the extent of future rate cuts. The Fed is expected to implement a potential quarter-point rate cut at its next major meeting following the November presidential election.⁷

1. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/september/
2. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/september/
3. https://www.bls.gov/news.release/pdf/jolts.pdf
4. https://adp-ri-nrip-static.adp.com/artifacts/us_ner/20241002/ADP_NATIONAL_EMPLOYMENT_REPORT_Press_Release_2024_09%20FINAL.pdf
5. https://www.dol.gov/ui/data.pdf
6. https://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
7. https://www.bls.gov/news.release/pdf/empsit.pdf

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Canadian Industry Regulation Organization (CIRO) and the Canadian Investor Protection Fund (CIPF).

Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors. Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavours to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.