Tucker Financial Weekly Market Review: September 6th, 2024

Weekly Market Report: September 6th, 2024

While the soft landing narrative still seems in charge, the month of September started out with a pretty rough week. Some single name narratives combined with a dose of concerning economic data resulting in a 4.2% loss in the headline S&P 500 and sharply lower bond yields. Developed and emerging equity markets were both down approximately 3.5% while small caps and the NASDAQ (growth stocks) were both down close to 5%. Ten year and 2yr UST yields fell from 3.91% to 3.72% and 3.66% respectively last week, leaving the 2yr/10yr in positive slope territory for the first time in two years. WTI crude oil fell sharply (-10%) to close at $68.22/barrel.

Market Anecdotes

• Monetary policy narratives focused on a trio of labor market reports last week leaving Fed Funds futures pricing in more of a ‘front-loaded’ path with six cuts now priced in over the next four meetings. Markets still see probabilities at 70% for 25 bps and 30% for 50 bps on September 18.
• UST yields hit fresh 52-week lows this week which can be seen as a ‘tailwind’ for equities due to a lower discount rate, but the ‘tailwind’ can certainly manifest as a ‘headwind’ if the reason for declining yields is heightened risk of economic and earnings slowdown.
• Bespoke noted that, while a lower Fed Funds rate (and very short end of the yield curve) needs to wait for formal FOMC policy announcements, bond markets price in forecasted policy moves in real time, allowing new issuers of corporate bonds and ABS to enjoy lower rates now.
• If recession fears are rising, the high yield bond market certainly doesn’t see it with spreads at 3.29%, well below the long-term average of 5.32%.
• The 2yr/10yr yield curve spread closed in positive territory last week for the first time since July 2022. The 3mo/10yr remains deeply negative at -1.41%, not too far off the cycle low of -1.86%.
• While hard data and soft (survey) data are clearly positively correlated, a chart from MRB acts as a good reminder that soft data tends to ‘overshoot’ on both up and down swings leaving investors best served focusing on hard economic data and corporate earnings trends.
• Commodity markets have been very mixed this year with oil, agricultural commodities, and most industrial metals down on the year countered by a very strong year for gold.
• The U.S. budget deficit has averaged 2.57% of GDP since 1948 with a recessionary 2009 GFC deficit of 9.75% and 2020 pandemic deficit of 14.7%. The 2023 budget deficit was 6.3% with 2024 projected near 7%.

Economic Release Highlights

•  August payrolls came in below the consensus estimate (142,000 vs 160,000) and the unemployment rate declined from 4.3% to 4.2% as forecasted.
• Labor force participation was unchanged at 62.7% and average hourly earnings edged higher and came in above consensus forecast on both MoM (0.4% vs 0.3%) and YoY (3.8% vs 3.7%).
• The JOLT Survey in July reported a significant decline in job openings to 7.673M, well below consensus forecast of 8.1M and the prior month reading of 8.184M.
• ISM Services Index for August registered 51.5, remaining in expansionary territory and coming in slightly above the consensus forecast of 51.1. ISM Manufacturing Index for August registered 47.2, relatively in line with the consensus forecast of 47.5.
• The JPM Global Composite PMI (C,M,S) of (52.8, 49.5, 53.8) showed a slight improvement in composite and services readings offset by slight deterioration in manufacturing.
• The Fed Beige Book on qualitative economic backdrop reported “flat or declining” activity in nine of twelve Fed districts.