Un-inverted
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Markets spent much of last week fretting about economic data, especially in the US, where weak manufacturing and job-opening surveys kept minds focused. Worries about the US economy culminated in a weaker-than- expected nonfarm payroll report for August and downward revisions to job figures for the previous two months. Economic worries trumped the promise of a start to Fed rate cuts to leave the S&P 500 2.4% lower over the week (in USD). US small caps did not fully benefit from the drop in US Treasury yields, with the Russell 2000ii dropping 1.5% last week, while optimism around the tech sector continued to ebb, leaving the Nasdaqiii 5% lower (both in USD). Government bonds were the big winners last week. Two-year US Treasury yields dropped and the yield curve inversion over 10- year Treasuries came to an end as markets continued to size up the possibility for hefty Fed rate cuts over the rest of this year. Oil prices kept declining last week, while the drop in US yields helped gold.
QUOTE OF THE WEEK
“The jobs report for August … supported the story of ongoing moderation in the labor market,” Federal Reserve Governor Christopher Waller said. “I do not believe the economy is in a recession or necessarily headed for one soon.”
KEY DATA
Nonfarm payrolls in the US rose 142,000 in August, lower than expected, while job gains for July were revised down to just 89,000. The unemployment rate ticked down to 4.2% from 4.3% while average hourly earnings grew by an annual 3.8% last month, up from 3.6% in July. The ISM purchasing managers’ index for manufacturing rose slightly to 47.2 in August from 46.8 in July but continued to show contraction. The Services ISM index was better at 51.5 in August. Factory orders in the US rose 5% in July over the previous month and were up 0.4% year-on-year.
German factory orders were also better than expected in July, rising (by 2.9%) for the second consecutive month. But German industrial production declined 2.4% from June and over 5% from a year before. Estimates of GDP growth in the euro area in Q2 were lowered from 0.3% to 0.2%.
The Caixin purchasing manager index (PMI) for Chinese manufacturing jumped to 50.4 in August from 49.8 in July, while the Caixin PMI services index slowed to 51.6 from 52.1.
MARKET VIEW
The reversal of the inverted US yield curve shows investors increasingly expect rapid Fed cuts. We see three 25 bps cuts this year. However, weaker oil prices are another sign of disinflation, which may give some central banks more leeway to cut rates. OPEC+ has responded by delaying an output hike.
We believe EPS expectations and company valuations are too high and are now underweight equities. We are overweight US government bonds.
On the policy front, the ECB’s meeting this week will give pointers on its rate path. Tuesday’s US presidential debate will be important, with the candidates divergent on key policies including tax. In Germany, the far- right’s regional strength is hurting the federal coalition and Volkswagen’s plans to close some German plants highlight the country’s malaise. To help its economy, China is considering cutting rates on USD5.3 tn of mortgages.
