Muzinich Weekly Market Comment: Off target

September 9, 2024

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In our latest roundup of developments in financial markets and economies, we look whether a disappointing week of economic data and risk asset performance is another short-term blip or sign of things to come.

The first Monday of every September in the US is a federal holiday, Labor Day, to recognise the contribution of workers to the country’s development. But despite the shortened week, market sentiment was poor as investors nervously awaited August’s nonfarm payroll report on September 6.

This would be the point at which they could assess whether the desired “Goldilocks” soft landing was still intact after disappointing July data,^[1] or whether the dreaded hard landing scenario was back on the table, requiring a more radical response from the Federal Reserve than previously anticipated.

Mixed picture

In the end, the jobs report was mixed.^[2] New hiring of 142,000 workers was well below expectations of 165,000 and showed that there was no significant rebound from July. However, the slight improvement in the unemployment rate from 4.3% to 4.2% and increases in average weekly earnings and hours worked suggest the labour market is not in freefall.

The report wasn’t enough to trigger fears of an imminent recession or increase expectations for a 50 basis points (bps) cut by the Federal Reserve later this month. However, investor concerns were raised by the downbeat tone in the latest Beige Book (a summary of economic conditions by the 12 regional Federal Reserve banks)^[3] and other soft labour data reports, including the ADP National Employment Report^[4] and the Jobs Opening and Labor Turnover Survey.^[5]

In our view, the door remains open for a potential supersized rate cut by the Fed in the near term while the risk of a hard — or, perhaps more accurately, not soft — landing remains real. The overnight interest rate swap market currently indicates there is a 77% probability of a 50bps cut in November.^[6]

Data disappoints in China, Europe

Elsewhere, the loss of momentum in China after a flow of softer-than-expected data since June, including the latest Purchasing Manager Index report,^[7] has led economists to question the government’s 5% growth target for 2024 and adjust their 2025 forecasts downward. The lack of an economic lift-off from the commodity hungry sovereign sparked a sell-off in energy and industrial metals.^[8]

Meanwhile, the Eurozone economy is showing signs of a potential double dip in growth. August PMI data was revised down by 0.2 points to 51.2,^[9] and Q2 GDP growth was adjusted downward to 0.2% quarter-on-quarter from the initially reported 0.3%.^[10]

Growth was largely driven by government spending, while underwhelming private investment and consumption continue to be a drag on the region’s economy. The failure of consumption to pick up, despite rising real incomes and resilient labour market, will be a concern to policymakers and has unsettled investors, contributing to a sell-off in European equities last week.

In Japan, wage data exceeded expectations, indicating an upward trend in salaries. Inflation-adjusted wage growth in July was positive for the second consecutive month at 0.4% year-on-year, down from June’s 1.1% but well above the consensus of -0.6%. Meanwhile, average cash earnings, which smooth out distortions caused by survey sample changes and is the Bank of Japan’s (BoJ) preferred measure, increased 4.8% year-on-year. This was slightly down month-on-month but significantly higher than the expected 3.2%.^[11]

The increase in wages has sparked concerns that rate hikes could be back on the table at the BoJ’s October meeting. Month-to-date, the yen has strengthened by 2% against the US dollar.

A risk-off week

Given the generally gloomy mood, it is perhaps unsurprising that the one asset class investors didn't fear last week was government bonds, with yields on 30-year US Treasuries and German Bunds falling 20bps and 15bps, respectively.

September has historically been a month of underperformance in equities and corporate credit over the last decade. Additionally, the three months leading up to a US election have traditionally posed headwinds for US equities.^[12]

Economists who maintain the inversion of the 2-year versus 10-year US Treasury yield curve is a reliable signal of an impending recession noted that the curve has normalised (the 2-year yield is now lower than the 10-year). However, in each of the last four economic cycles, the curve returned to normal before the recession began.^[13]

Perhaps the fear of holding too much risk in September prompted sell orders from investors in a disappointing week for risk assets.

Chart of the week: September – not such a vintage month for US stocks

Past performance is not a reliable indicator of current or future results.

Source: Ycharts.com, S&P 500, September 6, 2024. For illustrative purposes only.

References

[1] US Bureau of Labor Statistics, ‘Total nonfarm payroll employment edged up by 114,000 in July 2024,’ August 08, 2024
[2] US Bureau of Labor Statistics, ‘Employment Situation Summary – August 2024,’ September 6, 2024
[3] US Federal Reserve, ‘Summary of Commentary on Current Economic Conditions by Federal Reserve District,’ September 4, 2024
[4] ADP Research, ‘National Employment Report – August 2024,’ September 6, 2024
[5] US Bureau of Labor Statistics, ‘Jobs Opening and Labor Turnover Survey,’ September 4, 2024
[6] Bloomberg, as of September 6, 2024
[7] Reuters, ‘China's services activity expansion slows in August, Caixin PMI shows,’ September 4, 2024
[8] Oilprice.com, ‘Oil Prices Fall Back Despite OPEC+ Decision To Pause Output Hike,’ September 5, 2024
[9] S&P Global, ‘HSCOB Eurozone Composite PMI,’ September 4, 2024
[10] Eurostat, ‘GDP up by 0.2% and employment up by 0.2% in the euro area,’ September 6, 2024
[11] Ministry of Health, Labour and Welfare of Japan, ‘Provisional Report of Monthly Labour Survey,’ September 5, 2024
[12] Goldman Sachs, ‘Market Insights – Marquee,’ September 6, 2024
[13] Deutsche Bank, ‘Mapping Markets: How the yield curve normally steepens before a recession,’ October 3, 2023

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of September 6, 2024, and may change without notice. All data figures are from Bloomberg, as of September 9, 2024, unless otherwise stated.

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