September is a month known for new beginnings, from children going back to school to adults kicking off new post-summer routines. September is also known for being especially unfriendly to the stock markets, with key equity indices having had poor performances during the month over the past four years. It indeed began on such a note - the S&P 500 closed its worst week since March 2023 last week, down by 4.2%. The Nasdaq, the Dow, Stoxx 50 and several others, also ended in the red. Big tech stocks were particularly penalised.
September has also brought a new beginning in French politics. French Markets lit up after President Emmanuel Macron named former Brexit negotiator Michel Barnier as France’s new Prime Minister. France has been in a political crisis since Macron called a snap election in June, which ended with no party winning the majority needed to govern alone. Investors are relieved that the government can get back to focusing on the country's finances and present a budget for 2025 – which is required in the next weeks according to French law. Although markets mostly welcome the appointment of Barnier, perceived as a neutral centrist, it is still questioned to what extent a stable government can be formed. France’s gaping budget deficit remains the overarching concern.
Finally, September is the month during which many are anticipating a new phase of monetary policy from the US Federal Reserve, more explicitly, the onset of interest rate cuts. But of which magnitude will the first cut be? Last week’s data releases didn’t settle that question… Evidence of weak activity in manufacturing was balanced out by a still-strong services sector. The Fed's Beige book noted generally flat employment trends, but slower growth in more districts. Nonfarm payrolls came in below expectations, but above the prior month's level, and hiring ticked up slightly... In all, the size of the Fed’s September rate cut is still balancing on a seesaw between a 25 basis point reduction, or a larger 50bp…
Weekly Roundup
US labour market is cooling, giving the Fed another green light for a September rate cut
All eyes were on US job data last week after Fed Chairman Jerome Powell’s suggestion that the Fed is giving increased attention to the labour market amid greater confidence that inflation is now on a sustainable path back to 2%. Any indication that the labour market is cooling significantly, could push the Fed to adapt a more aggressive approach to the interest rate cuts that are set to begin in September.
In July, there were 7.7 million open jobs in the US, down from 7.9m the month before. There are now roughly 1.1 job openings per unemployed person, down from 2 in the aftermath of the pandemic. However, on a more optimistic note, total hiring picked up slightly after having fallen to a four-year low in June. Additionally, the US quit rate ticked up from 2% to 2.1%. The quit rate is generally a good indicator of the health of the labour market, with a high quit rate indicating that people are confident about their ability to find a new job.
Source: Bloomberg, BIL
Source: Bloomberg, BIL
Later in the week, the Challenger report showed that August saw a surge in job cuts with the most cuts in five months, and the most for any month of August since 2009, if we exclude the crash due to the pandemic in 2020. The Tech sector continues to announce the largest number of cuts, after years of rapid hiring and as changes sweep across the industry.
Source: Bloomberg, BIL
Last but not least, we had non-farm payrolls. Investors had hoped this release would give another strong clue as to the size of a September rate cut by the Fed. The long-awaited release at the end of last week announced that the US economy added 142,000 jobs in August, below the 160,000 forecast, but above the previous month’s 89,000. Following the release, Fed Governor Waller said that it’s important that the US central bank begins cutting rates this month, in order to avoid further weakening of the labour market. He added that he is “open-minded” about the potential for a bigger rate cut and that he would advocate for one if appropriate.
US Manufacturing remains weak, Services PMI shows more optimism
The ISM Manufacturing PMI increased to 47.2 in August, slightly above the 46.8 in July. A PMI reading below 50 tends to indicate contraction, implying that this is the fifth month of contraction of factory activity, at least according to the ISM survey, with the burden of high interest rates having a significant impact. We also believe political uncertainty is temporarily weighing on activity as the polarized Presidential election approaches, the outcome of which could significantly impact industrial policy. Manufacturing accounts for around 10% of the US economy.
Continuing the downward trend of the previous three months, new orders fell to 44.6 from 47.4 in July. Employment levels were also still trending downward; however, the speed of the descent is easing.
With slightly more optimism, the Services PMI rose further to 51.5 in August, suggesting that US service providers are gaining positive momentum. New orders rose to 53 from 52.4 in July, indicating solid demand. Job creation is, however, slowing.
Germany’s competitiveness questioned as important carmaker considers plant closures
The German automotive industry was rocked last week by the news that Volkswagen is considering its first-ever factory closure in Germany to cut costs. European carmakers are finding it increasingly difficult to generate profit in the switch to electric vehicles, with strong competition coming from China.
Germany has been struggling with a malaise in its industrial sector (which accounts for almost a quarter of total GDP) after being hit hard by the energy crisis and high interest rates. Addressing the Volkswagen work council, the Group CEO Oliver Blume said that “Germany in particular as a manufacturing location is falling further behind in terms of competitiveness”.
The automotive industry accounts for around 5% of the German economy and is a major employer, employing 779,700 people in 2023.
Amid particular weakness in Germany, as well as France, the Eurozone manufacturing PMI has lingered in contraction territory for two years now. The Eurozone Manufacturing PMI was 45.8 in August, unchanged from the two previous months. Ominously, the volume of new orders fell at the sharpest pace since the start of the year.
On this subject, German Factory Orders grew by 2.9% YoY in July, down from 4.6% in June. While this is encouragingly the second consecutive month of order growth, the clincher is that this was mainly due to large-scale orders for aircrafts, ships and trains – a volatile category. Without these, core orders were down 0.4%.
Brent crude hits lowest level this year
Last week, brent crude, the global oil benchmark, fell by over 5%, hitting its lowest level this year. This fall came following a Bloomberg report indicating that Libya may soon return to full production after a political dispute over control of the central bank shut down around 60% of Libya’s 1.2 million barrels per day of oil production. At the same time, demand from China, the world's biggest oil importer, was weaker than expected.
On Thursday, the OPEC+ (Organization of the Petroleum Exporting Countries and allies) agreed to delay the increase in oil output that was planned for the beginning of October for at least two months, to battle the sinking prices. The decision stabilised the oil price.
Source: Bloomberg, BIL, As at 10am 06/09/24
Economic calendar for the week ahead
Monday – China Inflation (August). US Consumer Inflation expectations.
Tuesday – UK Unemployment (July). Italy & Spain Industrial production (July). China Balance of Trade. US NFIB Business Optimism Index. European Commission Summer Forecasts.
Trump/ Harris debate - The candidates will go head-to-head for the first and perhaps only time before voters head to the polls in November. The previous debate between Trump and Biden was a market mover and we will be paying particular attention to rates and the EUR/USD exchange rate.
Wednesday – UK GDP, Goods Trade Balance, Industrial Production (July). US Inflation, CPI (August). China M2 Money Supply.
Thursday – ECB Interest Rate Decision and refreshed economic projections. US PPI, Continuing Jobless Claims (August).
Friday – Eurozone Industrial Production (July). US Michigan Consumer Sentiment (Prel, September).