Michael Reinking:
Good morning. I'm Michael Reinking, Senior Market Strategist at the New York Stock Exchange, and you are listening to the Market Storylines podcast on the Inside the ICE House podcast feed.
I hope you all enjoyed the long holiday weekend, and as always, I want to thank you for tuning in over the last few weeks. In addition, I'd like to send a special "thank you" to Trabue Bland, Senior Vice President of Futures Exchanges at ICE, for joining us last week.
Now, as we record here on Thursday afternoon, let's get to this week's storylines.
Last Friday, a late-day rally helped the S&P 500 close out the month of August on a positive note. The month started off with the Index falling over 7% in just three trading days, driven by a systematic unwind of crowded trades and a brief growth scare. But the Index closed higher for three consecutive weeks to end the month up over 2%, and once again, within 1% of its all-time high.
The strength and unabated nature of the rally caught investors off guard, myself included. Now, there was a historic decline in the VIX, which did force that same systematic community as the chase on the upside.
In addition, corporate buyback activity picked up sharply, and after the very weak jobs report at the beginning of the month, the economic data came in better than expected, including a strong retail sales report. That, coupled with sanguine corporate commentary during the July quarter-end earnings cycle, and a clear signal from the Federal Reserve that would begin cutting rates, seemed to calm fears of a precipitous decline in economic activity.
But just when you thought it was safe to get back into the water, we flipped the calendar to the month of September. Now, September can bring with it mixed emotions. It's the end of the summer, the start of the school year, and it's also the start of football season, which for me, usually leads to a little bit of optimism, at least for a couple weeks. But through the lens of an investor, seasonally, it has been a very difficult month for equity markets and the only month of the year with negative average returns.
It has been particularly weak in recent years, closing down in each of the last four years and seven of the last 10, down 2.3% over that timeframe. The September and October timeframe is also a difficult window in election years, with negative returns over that two-month timeframe as well.
Now, right on cue, the market kicked off this week by falling over 2% on Tuesday, driven by weakness in tech and commodity-related stocks. Now, the VIX surged back over 20 again, invoking some feelings of déjà vu to the start of last month.
Now, over the weekend, there was some slightly hawkish commentary from the BOJ, some slightly weaker-than-expected economic data out of China, and a modest miss on ISM manufacturing in the U.S. But for the record, that survey has remained in contractionary territory for every month but one, since November of 2022.
So, these were the headlines people were pointing to for the weakness, but none were surprising or shifted the overarching backdrop, once again, suggesting that technical factors were at play, and that this is one of the vol shocks we had discussed a couple weeks back.
As we highlighted in our last episode, the big focus this week is on labor market data, and that has started to trickle in over the last couple of days.
Yesterday, the JOLTS Jobs Openings fell to 7.7 million, the lowest level since 2021. While the level of job openings to unemployed - a ratio often cited by Fed officials - fell to 1.07, now firmly back below pre-pandemic levels.
Now, the data this morning was more mixed. The ADP job survey came in below expectations, showing a moderation in hiring trends and wages. While this morning's claims data came in better than expected, with initial claims pulling back to 227 thousand and continuing claims falling to 1.84 million from 1.87 million, last week.
Now, the data continues to point to a slowdown in hiring, but does not point to a significant inflection in separations. The attention will now turn to this Friday's BLS Employment Report with estimates calling for 160 thousand jobs to be added to the economy.
Now, the unemployment rate is expected to tick down to 4.2% from 4.3%. Now, there are some reasons to be skeptical about the weakness in the July jobs report, including weather impacts and other seasonal factors, which may have been behind the big increase in people who reported being on temporary layoffs.
This, coupled with the fact that claims data quickly reversed the jump in the first week of August and other economic data pointing to resilient economic backdrop, does not suggest a sharp turn in labor market conditions.
Now, as we discussed in last week's episode, the Federal Reserve has made it clear that the labor market data will be the key determinant of the pace of policy easing, going forward, and barring a very weak number on Friday morning and a further increase in the unemployment rate, I expect the Central Bank to cut rates by 25 basis points in a couple of weeks.
From an equity market perspective, we are clearly in the part of the cycle where there is a focus on the growth side of the equation, and good news is actually good news.
Looking out to next week, the focus in the U.S. will shift back to inflation, with CPI on Wednesday. Outside of the inflation data, it will be a quiet week of data in the U.S., which may put some more focus on economic data coming out of China, which has been at the epicenter of the global growth concerns, and has caused weakness in commodity markets, recently.
The other catalysts next week include the first debate between former President Trump and Vice President Harris, and an ECB rate decision where the Central Bank is widely expected to cut rates by 25 basis points. On the tech side, there are some key catalysts as well, with Oracle earnings in the company's CloudWorld conference in Las Vegas, and the unveiling of the new iPhone.
Thank you very much for spending some time with us today. Remember to tune in every Friday to the Market Storylines podcast on the Inside the Icehouse podcast feed, and rate, review and subscribe wherever you get your podcasts.
Thank you for listening. I'm Michael Reinking. I'll talk to you again next week.
Speaker 2:
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