Equity markets avoid laboring in holiday-week climb          

Brian Nick

The last week’s market highlights:

Quote of the week:

“Have a good time but remember
There is danger in the summer moon above.
Will I see you in September
Or lose you to a summer love?”
– “See you in September,” The Happenings  
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Midyear Outlook :
  • U.S. economy: Late cycle but no recession
  • Global economy: Still looking for a bottom    
  • Policy watch: Easy monetary policy to offset restrictive trade policy  
  • Fixed income: Volatile interest rates but no breakout in either direction 
  • Equities: Get defensive, stay invested 
  • Asset allocation: No longer “risk on,” but still prefer emerging-market bonds  

Global economy: No need to manufacture bad news                       

As if the unofficial end of summer weren’t depressing enough, last week investors found their recent memories of beach bumming, barbeques and balmy evenings replaced by a battery of dire headlines:
“How to get recession ready”
“Recession-proof your portfolio”
“Signs a recession is coming”    
The last one in particular seemed especially worrisome given disappointing U.S. manufacturing data, released the day after Labor Day. The purchasing managers’ index (PMI) from the Institute for Supply Management fell to 49.1 in August, shrinking for the first time following 35 straight months of growth. (Readings below 50 indicate contraction.) Reflecting uncertainty driven by the U.S./China trade war, the export orders component of the index plunged to a multiyear low. The employment subindex also tumbled.   
But the data perked up later in the week, partly easing recession fears. U.S. nonmanufacturing (or service-sector) activity—which  makes up about 80% of the U.S. economy—topped forecasts (56.4 PMI) in August, marking its 115th consecutive month of expansion. This provided evidence that trade-induced headwinds haven’t begun to hamper the broader economy, at least not yet, as exemplified by ongoing strong consumer spending.
Economies outside the U.S. seem to be operating at two speeds as well. Manufacturing PMIs are mostly stuck in low gear. Germany, France, Spain and Italy—the eurozone’s four-largest economies—merely showed signs of stabilizing last month, with only France experiencing a return to manufacturing growth (51.1). China (50.4) also emerged from contraction territory in August.   
In contrast, nonmanufacturing activity overseas continued to accelerate in August, as it did in the U.S. Among the numbers suggesting the global economic expansion still has gas in the tank:
  • PMIs in France, Spain and Germany all handily topped 50.
  • China (52.1) enjoyed a solid month as job creation reached its fastest pace since June 2018.
Additional monetary easing could provide a global spark. Last week, China’s central bank  reduced its reserve requirement ratio—the amount of money commercial banks are required to set aside and not lend—in order to free up cash for financing construction and infrastructure projects. On September 12, the European Central Bank is widely expected to announce a “bazooka” of stimulus, including interest-rate cuts and substantial bond purchases. The following week, markets are anticipating another 25-basis-point rate reduction from the Federal Reserve.

August payrolls: Meh   

Despite getting a boost from temporary hiring for census workers, the U.S. economy created just 130,000 jobs in August, undershooting forecasts of 160,000. And downward revisions to June and July payrolls (-20,000 combined), lowered average monthly employment growth to 158,000 thus far in 2019, from 223,000 last year.
This decline is likely due to a combination of supply and demand constraints. On the supply side, the unemployment rate (3.7% in August) has been hovering near a multi-decade low since February, reflecting a smaller pool of available workers. In terms of demand, some employers, especially in sectors exposed to trade, may be hesitant to bolster payrolls amid concerns over the health of the economy. With jobs remaining unfilled, wages continue to creep higher. On a year-over-year basis, average hourly earnings (+3.2% in August) have risen by at least 3% in 11 straight months—good news for employee paychecks.
Also on the upswing is the percentage of Americans working (60.9%). That’s the highest level in this economic cycle, and it’s helping sustain consumer confidence and personal spending.
While August’s headline payrolls number was disappointing, of potentially greater concern was the increase in the U-6 “underemployment” rate, from 7.0% to 7.2%. (This rate encompasses both unemployed workers looking for jobs and part-time employees seeking full-time work.) In addition, fewer people reported having left their job for another one. And the breadth of hiring across different sectors of the economy hit its lowest mark in more than three years, signaling that job growth has become concentrated in fewer industries.
Markets had little reaction to the employment report. The S&P 500 Index posted a modest gain on Friday. The yield on the bellwether 10-year U.S. Treasury note, which spiked 10 basis points the day before following the strong U.S. service-sector release, was largely unchanged. In our view, August’s jobs report reinforces our long-held position that the U.S. economy is slowing down—and may continue to do so—but a near-term recession remains highly unlikely.
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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