After starting the week with a strong rebound, stocks ended the week erasing most of the strongest two-day gain since April 2020. Recent data is beginning to shift as economic conditions slow, but observers speculate whether the shift is enough for central banks to slow or pause the pace of tightening. Initially, the market responded to the Central Bank of Australia’s announcement to slow the rate hikes and the Bank of England’s intervention, purchasing long-dated bonds to settle the bond market. The energy sector led last week when oil jumped 16.4% on the news OPEC decided to cut production by 2 million barrels. Sabotage on the Nord Stream pipelines and western leaders’ appeals to maintain production levels fell on deaf ears when OPEC convened to set production quotas.
On Monday, the ISM Manufacturing index dropped to 50.9% in September from 52.8% in August. (A reading above 50 denotes an expansion.) The current level was the lowest since May 2020, when the index registered a reading of 43.5%. New Orders contracted, falling to 47.1%, 4.2 points lower than the August reading of 51.3%. The Production index came in at 51.7%, a 0.2 percentage point increase over August, and the Prices index fell 0.8 percentage points to 51.7%. New Export Orders fell to 47.8%, a decrease of 1.6 percentage points. The US manufacturing is expanding, but the growth rate is slowing if the New Orders and New Export Orders in contraction territory are any indication.1 In another sign economic activity is slowing, the Census Bureau released the estimated construction spending data for August, falling 0.7% over the revised July level. Construction spending in the first eight months of the year grew at 10.9% versus the latest reading of 8.5% over the same timeframe in 2021. Total private and public spending also contracted by 0.9% and 0.8%, respectively.2
On Tuesday, the Labor Department reported job openings fell to a 13-month low of 10.1 million. The latest jobs report is the fourth decline in five months, and while the job market is still strong, the strength is diminishing with inflation and as higher rates work through the system. Still, the quits rate is high at 4.16 million, indicating workers think they can replace their current employment with a better job.3 The Commerce Department reported factory orders were flat in August, with durable-goods orders declining 0.2% and non-durable orders increasing 0.2%.4
On Wednesday, the ADP National Employment Report stated that private sector jobs increased by 208,000, and annual pay was up 7.8% year-over-year. The goods-producing sector lost 29,000 jobs, whereas the service sector picked up 237,000.5 On Friday, the US labor Department released the September total nonfarm payroll employment data showing an increase of 263,000. As reported in the ADP jobs report, the service sector, mainly leisure, hospitality, and health care, reported notable gains.6
The Department of Labor’s initial claims report on Thursday reported initial claims for the period ending October 1 were seasonally adjusted to 219,000, an increase of 29,000 from the previous week. Continuing claims for all benefit programs for the period ending September 17 came in at 1,246,999, a decrease of 55,459 from the last reporting period .7
With the labor market, particularly the jobs data, as strong as it is, the US economy remains too robust for the Fed to achieve its 2% inflation rate soon. The labor market is likely to weaken over the coming months as the economy slows, but historically, it takes months before Fed rate increases reflect higher unemployment. Concerning market participants, the target rate increased over the year from the expected 4% to 4.6%, and the timeline extended before the Fed is expected to pivot. We believe that unless there is some exogenous event, such as an increase in the Ukrainian war or the collapse of the German economy, equities are likely to be more volatile than we have seen in the recent past and likely to move lower in the coming months with further rate increases.
Sources:
2 https://www.census.gov/construction/c30/pdf/release.pdf
3 https://www.bls.gov/news.release/pdf/jolts.pdf
6 https://www.bls.gov/news.release/empsit.nr0.htm
7 https://www.dol.gov/ui/data.pdf
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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