August – September 2024

Stephen Zielinski

Economic and Market Highlights

The Economy

  • The recent jobs report brought a mix of news. Job growth accelerated to 142,000 positions, while the unemployment rate dipped to 4.2% from July’s 4.3%. However, downward revisions to job gains in previous months suggest softer trends. This report played a key role in the Federal Reserve’s decision to cut short-term interest rates by 50-basis-points (0.50%) in September.
  • Manufacturing continues to struggle, with the ISM Manufacturing Index rising slightly to 47.2 in August from 46.8 in July, but still indicating contraction (below 50). This marks 21 of the last 22 months of manufacturing decline, one of the longest downturns in history.
  • Inflation pressures appear stable. July’s Personal Consumption Expenditures (PCE) price index rose 0.2%, advancing 2.5% year-on-year, while Core PCE inflation also gained 0.2%, reaching 2.6% year-on-year. Consumer spending increased 0.5% in July, while personal income climbed 0.3%. However, the personal savings rate has fallen to 2.9%.
  • Internationally, global growth remains positive. The U.S. economy outperformed expectations with 2.8% growth in Q2, while the Eurozone saw a modest 0.3% quarterly growth. Real GDP in the UK rose by 0.9% for the three months to May 2024, reflecting solid service sector output.
  • Global economic conditions have maintained a cautious sentiment, but U.S. equities rebounded after recent dips due to monetary stimulus created by lower interest rates. Meanwhile, U.S. Treasury yields remain steady, with the 2-year and 10-year yields little changed after this week’s interest rate cut, respectively.
  • Globally, G7 economic data has been sparse, but indicators like the Conference Board’s employment trend index for August and the Atlanta Fed’s GDP now model projecting 2.5% GDP growth for Q3 2024 have alleviated some recession concerns.
  • China’s exports in August surged unexpectedly, hitting a 17-month high with 8.7% YoY growth, defying predictions of a slowdown. Imports, however, remain sluggish due to weak domestic demand, and iron ore prices have dipped below $90/ton, reflecting China’s economic slowdown.

Fixed Income

  • The fixed income landscape saw major developments, with Federal Reserve Chair Jerome Powell signaling a shift toward easing monetary policy at the Jackson Hole symposium, followed by a 50 bps cut in mid-September.
  • In Europe, former ECB President Mario Draghi called for €800 billion in additional EU investments, but markets have yet to react significantly. Bond issuance in the Eurozone is expected to temporarily add to steepening pressures, with both the EU and Italy set to release large tranches of bonds.
  • The Bank of England (BoE) made its first post-pandemic rate cut, reducing interest rates from 5.25% to 5%. Despite this, BoE Governor Andrew Bailey has signaled that further cuts may be limited in the near term. Meanwhile, Poland’s National Bank confirmed its dovish stance, with Governor Glapiński projecting rate cuts in the second quarter of 2025, targeting a 100-basis-point reduction.
  • European market expectations are heavily focused on how much further the central bank will ease monetary policy amid global uncertainty and potential knock-on effects for EUR/USD. Likewise, Hungary’s central bank is facing decisions on whether to cut rates in light of improving inflation data, while Czechia’s inflationary pressures may also lead to monetary easing. Each country’s unique challenges, particularly in inflation and services costs, reflect broader struggles within Europe’s economy.
  • Corporate bond markets performed well, with investment-grade yields dropping from a year-to-date high of 5.85% in April to 5.04%. Looser monetary policies globally are expected to further support corporate credit.
  • Fixed Income Bond markets have shown mixed movement. The U.S. yield curve continues to flatten slightly, with short-term yields rising. The dis-inversion of the U.S. Treasury curve is firming, and further steepening is anticipated as market participants expect more rate cuts. European bonds followed similar trends, with steepening in the Bund curve, especially as the European Central Bank (ECB) considers further economic stimulus in response to weak investor sentiment, highlighted by the disappointing Sentix investor confidence data.

Equities

  • Equity markets showed resilience, with major U.S. indices rebounding after a sell-off, early in the month. The potential for dovish monetary policies, including rate cuts, has been a driving factor in the recent market optimism. The S&P 500, Dow Jones, and Nasdaq all posted gains so far in September. In Europe, equities also advanced, with a particular focus on EU policies and new bond issuances.
  • Notably, Nvidia saw a sharp decline of over 10%, marking the largest single-day market cap loss in history as investors reassessed the AI-driven tech rally. However, the “Magnificent 7” stocks have seen capital expenditures reach unprecedented levels, outpacing even the energy sector.
  • Small-cap stocks have continued to outperform. The Russell 2000 index surged 10.3% in July, buoyed by expectations of interest rate cuts, which are expected to benefit smaller companies more than large-cap peers. The Vanguard Russell 2000 ETF is emerging as a strong option for capturing this potential bull run.
  • In the commodities market, oil prices have plunged more than 16% from July highs, marking year-to-date lows, while natural gas prices surged in August.
  • Commodities have been volatile this month. Oil prices found support, despite a bearish sentiment at the Asia Pacific Petroleum Conference (APPEC), driven by concerns about Chinese demand and a well-supplied market. OPEC+ is facing tough decisions about either managing supply or opening the taps to regain market share. Iron ore, meanwhile, has been among the worst-performing commodities, with prices now down about 33% year-to-date due to weakening demand from China, the world’s largest buyer.
  • Developments come at a time of heightened volatility in global markets, where energy prices, wage growth, and geopolitical risks all shape economic forecasts.

This communication was prepared for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security/instrument or to participate in any trading strategy. Past performance is not indicative of future results. See below reference sources used in preparing the above information.