Michael Reinking:

Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Every week we are here to keep you up to date on the key trends and events driving global markets with August in the summer officially in the books and football on the mind, it has been a choppy week of trading thus far ahead of the biggest catalyst of the week, the BLS employment report on Friday. Now we are recording on Thursday afternoon, so let's dive into this week's Market Storylines.

Now, a solid month of August ended like a long drive that stalled out in the red zone on Friday after closing above 6,500 for the first time in the previous session, the S&P 500 fell just over a half a percent with tech leading to the downside, driven by some disappointing tech earnings and reports that Alibaba was working on its own chip for the Chinese market. Now, in addition, tariffs were back in focus with Caterpillar increasing its estimate for tariff impact and reports that the administration was preparing to issue more Section 232 tariffs in the coming months, which would prove to be more durable than the IEPA tariffs which were being challenged in court.

Well, that story was well-timed because after the close, the US Court of Appeals threw a flag upholding the court of an international trade ruling for May deeming the IEPA tariffs illegal by a vote of seven to four. Now that being said, the court will allow tariffs to remain in place until mid-October and withhold judgment pending a decision by the Supreme Court. Now, this potentially drags out the uncertainty related to tariff policy, but as the earlier Wall Street Journal report noted, the administration is prepared to call an audible at the line of scrimmage.

Now, despite the pullback on the final day of the month, August ended with solid gains. The S&P 500 was up nearly 2%, but more notable, small and mid-cap indices were up around 7% with the prospect of rate cuts coming into view. Now as we've been discussing, the two-month window of August and September tend to be a seasonably difficult time period for equity markets, but the headwinds get particularly strong in September, which is the only month of the year with a negative return profile since the 1950s, and it has been particularly difficult month recently with the S&P 500 closing lower in four of the last five years by an average decline of over 4%.

Now, September's reputation preceded it coming out of the long weekend with the summer in the rear view and the start of school equity markets reflected the general mood falling sharply early in the session as global yields moved higher, particularly at the long end of the curve with growing political and fiscal concerns in the UK, Europe and Japan. Now, this coupled with continued fed independence concerns and questions about revenues generated from tariffs also pushed treasury yields higher with a 30-year yield testing, the closely watched 5% level.

Now at the lows, the S&P 500 was down around one point a half percent with broad-based weakness, but unlike the Alabama Crimson Tide traders defended key support around 63/50, the lows before Powell's Jackson Hole speech and markets rallied in the back half of the session cutting losses in half. Now, the S&P 500 extended to the upside on Wednesday, but that was a bit misleading as the gains were almost completely driven by strength in Alphabet and Apple after the US, district Courts ruled that Alphabet would not need to divest its Chrome browser as part of the antitrust investigation and the revenue sharing agreement between the two companies could continue. Now, broader indices were lower for most of the session, but a strong second effort push late in the session kept the drive alive.

First down, equity markets are continuing to move higher today as yields are pulling back, following a better than feared 30 year auction in Japan overnight and a round of labor market data that is pointed to a continued slowdown in hiring. Now on the eve of tomorrow's BLS employment report and the kickoff of the NFL season, let's talk about this week's economic data. Now, the JOLTS jobs openings fell to 7.18 million below estimates within that data, the hirings and separations were largely unchanged month over month, but what caught my eye was the large negative revisions to layoffs and discharges, which were revised up by 192,000 for June to about 1.8 million. Absolute levels still remain low by historical standards at about 1.1% of all employees, but from my perspective, it's something very important to watch because the slowdown in hiring is one thing, but when layoffs start to occur, the situation can get more dynamic.

Now, the ADP report has taken, which has taken on a newfound importance given the BLS controversy showed 54,000 private sector jobs were added to the economy slightly below estimates in down from 104,000 last month. Now, initial claims have been trending higher over the last two months, hitting 237,000 up from its recent trough of 217,000. Once again low by historic standards, but the trend is moving in the wrong direction. Now, continuing claims did move down to around 1.94 million.

Now in this morning's report, ADP Chief Economist, Nela Richardson said a variety of things could explain the hiring slowdown including labor shortages, skittish consumers, and AI disruptions. Now, this is one of the first times I've seen AI officially called out in economic data as having an impact, and it was also highlighted in the Challenger, Gray & Christmas Job Cut Report, which showed a big jump in August. Though according to the report, farmer companies announced 19,000 layoffs in August with AI implementation named as one of the primary drivers. Now, the flip side of that implementation and the bull case related to the AI adoption is that it will lead to a productivity boom. There was a big jump in Q2 productivity, which hit 3.3% well ahead of estimates and also cause unit labor costs to moderate to around 1% from over 6% in Q1. But keep in mind, these numbers are very volatile. Now, the other survey or soft data this week, including the Beige Book and ISM surveys also pointed to a moderation in economic activity and has fed some of the speculation narrative.

Now, with major US entities hovering around unchanged for the week just below all time highs. The big question is whether the Wall Street bulls can push the ball over the goal line or whether the bears can make a stand tomorrow. Economists are looking for 75,000 jobs to be added to the economy and the unemployment rate to take up to 4.3% from 4.2%. Now, obviously, revisions will be closely watched. Now at this point, it seems extremely likely the Fed will cut by 25 basis points in a couple of weeks. Now, if tomorrow's number is really weak, the conversation about a potential 50 basis point cut will enter the conversation. It would take a surprisingly strong jobs report and really hot inflation data next week to take a cut off the table. While that is unlikely, the data will shape what monetary policy looks like through the remainder of the year.

Now, looking ahead to next week before the focus shifts to inflation, the BLS will release benchmark revisions to the labor market data, which are expected to be negative. This will be followed by PPI and CPI on Wednesday and Thursday. There will also be a round of treasury auctions with 10 and 30 years being closely watched and while the Fed is in its media blackout window, the ECB will have a rate decision and is expected to leave rates unchanged. Now, the no confidence vote in France on Monday, which has been a source of volatility could also get some attention, and if the Crimson Tide find a way to lose to Louisiana, Monroe this weekend, there will likely be a no confidence vote in Tuscaloosa as well.

Now, that's going to do it for this week. Thanks for spending some time with us. If you like today's episode, please tell a friend or leave a comment wherever you listen to your podcast. Enjoy this weekend and some football. Thanks for joining me. I'm Michael Reinking. I'll talk to you again next week.

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