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09/6/22

Sightline Weekly Market Update: Markets Prepare for Future Fed Rate Hikes

Equity markets tumbled for the second week after digesting comments from Fed Chair Jerome Powell in his Jackson Hole speech on August 26, where he committed to raising rates and keeping rates elevated until inflation moves toward the 2% goal. Further, Chair Powell acknowledged the commitment to lower inflation would cause pain to the labor market and the economy in general. Not surprisingly, the hawkish tone prompted investors to dump high valuation growth and energy stocks while value stocks slid but held up better. Stocks reporting weak earnings and guidance were punished more than those that beat earnings. Energy suffered from the prospect of a recession, with oil falling below $90 per barrel for West Texas Intermediate crude. OPEC met on Monday, September 5 and has previously stated it would cut production to maintain pricing support.  

 

On Tuesday, the Conference Board Consumer Confidence Indices showed significant improvement in August following three consecutive monthly declines. The Consumer Confidence Index increased to 103.2 versus July’s 95.3. The Present Situation Index, based on consumers’ assessment of current business and labor conditions, rose to 145.4 from 139.7 in July. The Expectations Index based on consumers’ short-term outlook for income, business and labor market conditions increased to 75.1 from 65.6. 1 Also, last Tuesday, the S&P CoreLogic Case Shiller 20 City Home Index released the latest reading (July) with a year-over-year 18.6% increase but down from the year-over-reading last month (June) of 20.5% and the expectation of 19.5%. The most significant gains came from Tampa (35%), Miami (33%), and Dallas (28.2%).2 As mortgage rates rise, the housing market may continue to cool. 

 

The US Bureau of Labor and Statistics reported job openings for July remained steady at 11.2 million. Hires, separations, and quits changed little at 6.4 million, 5.9 million, and 4.2 million, respectively. 3 The ADP National Employment Report shows private sector employment increased by 132,000 jobs in August, with goods-producing sectors adding 23,000 and service-providing sectors adding 110,000 jobs in August. By region, the south contributed the lion’s share of the jobs at 76,000.4 On Thursday, The Department of Labor released the latest initial claims for the week ending August 27. Claims decreased by 5,000 from the previous week to 232,000. Continuing claims for all benefit programs for the week ending August 13 was 1,438,128, a decrease of 10,407 from the previous level.5 Unit labor costs increased year-over-year by 9.3%, the highest since Q1 of 1982.6 This data from BLS earlier in the week and from ADP private companies suggests the labor market remains strong, forcing the Fed to raise rates for longer than initially anticipated by market strategists.  

 

The August Manufacturing PMI reading at 52.8 equaled the reading of July. Any reading over 50 indicates growth. The latest reading is the 27th month in a row that the economy in the US has recorded an expansion. The New Orders index rose 3.3 points higher than the July reading to 51.3%, and the Production Index fell 3.1 points to 50.4%. The Prices Index fell to the lowest since June 2020, falling 7.5 percentage points to 52.5%.6 On Friday, the nonfarm payroll employment rose by 315,000 versus the expected 298,000. The unemployment rate increased to 3.7%, and the labor participation rate increased slightly to 62.4% from 62.1% in July. Average hourly earnings month-over-month ticked higher by 0.3% versus the expectation of 0.4%, bringing the year-over-year hourly earnings to 5.2% versus 5.3% expected.7

 

The labor market conditions are one of the indicators the Fed is watching closely. While the labor market remains resilient, the Fed is expected to continue on the aggressive path of tightening until the labor market softens, which is required to bring down inflation toward the stated 2% goal. As we head into the September and October months of the year, we may see more volatility as the data drives investor spirits. 

 

 

Sources:

1 https://www.conference-board.org/topics/consumer-confidence

2 https://tradingeconomics.com/united-states/case-shiller-home-price-index-yoy

3 https://www.bls.gov/news.release/jolts.nr0.htm

4 https://adp-ri-nrip-static.adp.com/artifacts/us_ner/20220831/ADP_NATIONAL_EMPLOYMENT_REPORT_Press_Release_2022_8%20FINAL.pdf

5 https://www.cnbc.com/2022/09/01/jobless-claims-total-232000-the-lowest-level-in-two-months.html

6 https://www.prnewswire.com/news-releases/manufacturing-pmi-at-52-8-august-2022-manufacturing-ism-report-on-business-301615866.html

7 https://www.bls.gov/news.release/empsit.nr0.htm

 

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 Investment Industry Regulatory Organization of Canada (IIROC) 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 endeavors 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.

 

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