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 Icehouse Podcast feed. Once again, I'd like to thank everyone for spending some time with us today. Now, as we record on Thursday afternoon, let's get to this week's Market Storylines. As we approach next week's FOMC policy meeting, there have been a couple pieces of key economic data released over the last week that will help to shape their decision, including last Friday's employment report and this week's inflation data. I'll dive a little deeper into that data and talk about expectations for that meeting in a moment, but let's discuss the continued volatility in equity markets first.
Broadly speaking, the economic data has been largely in line with market expectations, but that hasn't stopped the volatility, which continues to point to positioning options, markets, and technicals as key drivers. After Friday's jobs report, the S&P 500 opened around unchanged, but as the VIX moved through 20, which has been a fulcrum point for volatility over the last week, the S&P 500 definitively broke below its 50-day moving average, which is just over 5,500, selling off over 2% to close on the lows, ending the week down about 4.3%, the worst weekly decline since March of 2023, the week of the Silicon Valley Bank failure.
Equity markets closed on the lows as the VIX did not see the typical compression following a key catalyst or heading into the weekend, suggesting there was still some nervousness, but also likely some reticence for traders to go out short volatility heading into the weekend with the first weekend of August fresh in their memories and better to enjoy the first full weekend of football with a clear mind. With the losses contained in Asia over the weekend and a lack of catalysts in the U.S., there was some vol compression in the first two trading days of the week, and equity markets bounced back, recouping pretty much all of Friday's losses, but that 20-level in the VIX continued to be a driver of intraday volatility.
Wednesday was a particularly volatile session as investors digested Tuesday night's debate and a slightly hotter than expected CPI report. Once again, the S&P 500 opened around unchanged, but as the VIX moved up to around 21.5, the S&P 500 fell over 1.5% To retest Friday's lows Again. However, volatility sellers showed up mid-morning helping to push the VIX lower. This coupled with some positive comments from Nvidia CEO, Jensen Huang, helped to trigger a rally in equity markets. The S&P 500 closed up over 2.5% off of the lows with the VIX breaking back below 18, the lowest level in weeks. As we're recording, mid-Thursday afternoon, the S&P 500 is up about 3% for the week, recouping a good portion of last week's losses. Now, tech stocks continue to lead to the upside as global growth concerns percolate in the background weighing on cyclical stocks and oil prices.
So let's dive into the data. Last Friday's BLS employment report showed 142,000 jobs were added to the economy, which was slightly below expectations, while the unemployment rate ticked down a 10th of a percent from July to 4.2% as the number of people reporting temporary layoffs fell after the big jump last month. Now, on the surface, the report was largely in line with expectations, but there was a big blemish with a negative revision of 86,000 jobs to the previous two months, breaking a string of seven years of positive revisions in the month of July. Now, this coupled with the other labor market data released last week points to a moderation in hiring trends. With the backdrop clearly moving in the wrong direction.
The average job gains over the last six months is around 163,000, down from 212,000 at the start of the year. While the average of the last three months is only 116,000, which is still subject to further revisions. However, as we've highlighted, the recent increase in the unemployment rate has been driven primarily by an increase in labor force participation and immigration trends. At this point, we are not seeing large layoff announcements or big increases in claims data, which is what the Fed is trying to avoid. From my perspective, this data was kind of down the fairway, but didn't help to definitively put the debate about a 25 or 50 basis point cut to bed as it wasn't quite strong enough to completely remove the idea of a larger cut or weak enough to embolden the committee to get more aggressive.
With the committee entering its media blackout window last weekend, there was a small window for them to send a message that they were considering a larger cut. We did hear from one of the more influential Fed governors, Christopher Waller, on Friday, who was a proponent of front end loading rate hikes during the last cycle. He did say that larger cuts could ultimately be needed and that he would once again be an advocate of front end loading those cuts if appropriate, a decision that would be determined by new data. Now, the only real impactful new data coming ahead of the Fed's rate decision was this week's inflation data and next week's retail sales. Wednesday's inflation data, like the employment report, was largely in line with expectations with headline up 0.2% monthly and up 2.5% on an annual basis, down from 2.9% last month.
The blemish here is within core, which came in a 10th hot at 0.3% for the month with the annual reading holding steady at 3.2%. This once again was driven by an increase in the shelter component, which was up 0.5%, the highest level since last January. This component is up 5.2% over the last year accounting for about 70% of the overall increase in inflation. This has been an oft-discussed topic as it has been overshooting other real-time metrics, and it also carries a larger weighting in CPI as compared to the Fed's preferred gauge of inflation PCE. Today's PPI report was also largely in line with expectations as was the claims data. Now, I've been in the camp that the central bank will cut 25 basis points as it likes to move methodically by consensus and with clear messaging to the market.
From my perspective, the window for the Fed to describe rate cuts as preemptive or insurance cuts closed in July after the jobs report as things have more clearly slowed. Given rates are currently so far above the committee's range of views of its long-run neutral rate, which are between 2.5% and 3.75%. A case could be made for a larger cut to show commitment to stem the recent slowdown. However, at this point, the totality of the data, the committee's preference to telegraph its moves, the optics of a larger cut just ahead of an election, and the fact that a surprise 50 basis point cut would only exacerbate volatility in currency markets and the unwind of carry trades, I still sit firmly in the 25 basis point camp.
Looking out to next week. The focus will be on central bank rate decisions with the Fed in Brazil on Wednesday, the BOE and PBOC on Thursday, and the BOJ on Thursday night. The key economic data will be the retail sales report and the regional surveys will give us our first look at September activity. Also, keep in mind next week is triple-witch expiration, where stock options, index futures and index options all expire on the same day. Friday is also the S&P quarterly index rebalance. This day is typically one of the heaviest volume days of the year. 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. 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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