The last week’s market highlights:
Quote of the week:
“Summer is only the unfulfilled promise of spring, a charlatan in place of the warm balmy nights I dream of in April. It's a sad season of life without growth...It has no day.” – F. Scott Fitzgerald, This Side of Paradise.
Each week, we present our featured topics in the context of the major themes listed below from the Nuveen Midyear Outlook:
- U.S. economy: Running ahead of its peers.
- Global economy: Trade a bigger concern outside the U.S.
- Policy watch: Central banks aren’t all on the same wavelength.
- Fixed income: Starting to prefer higher-quality assets.
- Equities: Earnings are supporting prices, but expect plenty more volatility.
- Asset allocation: Remain risk on, but focus on quality.
U.S. economy (Part 1): “Wage” a minute! Average hourly earnings jump in August
U.S. employers added 201,000 payrolls in August, topping expectations for around 190,000. However, employment gains for June and July were revised down by a combined 50,000, making the headline figure weaker than it appears. Despite these revisions, job growth, on average, remains a still-solid 194,000 over the past 12 months and 185,000 over the prior three months. The unemployment rate held firm at 3.9% in August, just below an 18-year low.
Most encouragingly, average hourly earnings (AHE) increased by 0.4% last month—double the consensus forecasts—and 2.9% over the past 12 months. This marked the fastest year-over-year increase since 2009. More good news came in the form of a drop in the U-6 “underemployment” rate to 7.4%, its lowest level since 2001 and a sign that formerly discouraged workers are finding their way into full-time employment. On the down side, the labor force participation rate dipped from 62.9% to 62.7%. It’s been stuck between 62.6% and 63% for more than 2½ years.
After remaining largely unchanged for the first three days of the holiday-shortened week, U.S. Treasury yields moved higher in the immediate wake of the employment data. The pop in AHE was a major contributor, because bond markets tend to watch for signs of wage inflation as a precursor to stronger overall inflation, which in turn may affect Federal Reserve rate policy. The yield on the bellwether 10-year note rose 6 basis points (0.06%) on September 7, to close the week at 2.94%. Similarly, the 2-year Treasury rate, which is particularly sensitive to Fed actions, increased 7 basis points, to finish the week at 2.71%.
Meanwhile, after trading flat before the jobs report, the U.S. dollar strengthened. Taken together, the moves in Treasury yields and the dollar represented a classic response to a better-than-anticipated jobs report—or at least one that seems unlikely to knock the Fed off its current path of steady, moderate rate hikes.
U.S. economy (Part 2): Have tariffs hurt the broad U.S. economy? There’s scant evidence of that—so far
Trade issues are poised to dominate financial headlines again this month—probably until the Fed’s September 26 meeting. Will this be reflected in market behavior? In March and June, without fresh good news on corporate earnings to focus on, investors grew nervous about announced or about-to-be-implemented tariffs. Equity markets saw spikes in volatility, and S&P 500 consensus earnings revisions in those two months were among the weakest of the year so far. But while the domestic equity market still closely follows the latest NAFTA or China-related headlines, incoming data suggests the U.S. economy has experienced very little fallout from aggressive White House trade policy. That hasn’t been the case, however, for some other economies.
The broad effects of protectionism are indeed a net negative. They manifest in anecdotal data, “soft” survey data, and “hard” real activity data. So far, the anecdotal data is worrying. We’ve read stories of individual companies, many of them small businesses, that have blamed tariffs on planned cutbacks in hiring, expansion, or other expenditures. But what we don’t yet know is whether the anecdotes are both numerous and severe enough to dent overall business sentiment and, eventually, broad economic activity.
The soft data, some of which was reported last week, is still saying “no.” For example, the Institute for Supply Management’s manufacturing survey surged to 61.3 in August, its highest level since May 2004. (Readings above 50 indicate expansion.) This suggests that America’s factories haven’t been damaged by higher input costs. Moreover, more businesses still plan to make investments in the next 6-12 months than they have over the past several years. In terms of hard data, employment in manufacturing has grown at a healthy clip since the year began, despite edging lower last month. And capital goods orders and spending are increasing by nearly 10% year-over-year.
Outside the U.S., there is more evidence—much of it still circumstantial—of trade’s negative effects. Eurozone GDP slowed in the second quarter, China continues to ramp up its stimulus dosage, and global investors are jittery about holding almost any non-dollar currency.
We know how protectionism fears might be linked to these phenomena. Trade is more integral to most large developed and emerging economies than it is to the U.S. Moreover, a decrease in global trade poses a greater threat to more open economies. Interestingly, fiscal stimulus is one factor pushing back against the decline in global trade: Americans are using their extra after-tax money to buy more imports. In fact, imports have hit an all-time high. In effect, U.S. trade policy has helped fuel a surge in the trade deficit even as the White House pursues other policies with the intention of shrinking the trade gap.