Out of the gate, it appeared the summer swoon that had largely been avoided in June and July was going to plague the month of August as a disconcerting employment report, suggesting a nascent slowdown in the labor market, rattled investors. Volatility spiked, resulting in a massive sell off in stocks, and a flight-to-quality ensued as longer-dated U.S. Treasuries saw their yields plummet as market participants flocked to purchase safe-haven assets with the expectation the Federal Reserve would soon enact rate reductions to stave off any further deterioration in the employment landscape. This bout of angst proved to be short-lived, reversing rather quickly as markets calmed, and volatility eased. By month’s end, bond market indices registered a third consecutive month of robust returns as yields continued to descend, especially in the intermediate tenors, causing the yield curve to further “disinvert” (normalize/steepen). Major U.S. equity indices finished the month in positive territory as well.
On August 23, economists, investors, and market practitioners were fixated on Fed Chairman Powell’s speech delivered at the Fed’s annual economic symposium in Jackson Hole, Wyoming. The speech, titled “Reassessing the Effectiveness and Transmission of Monetary Policy”, was terse, yet acute in communicating the central bank’s near-term policy outlook, a self-critique of its flawed 2021 “transitory” inflation hypothesis, but also self-acclaim for countering that error via a rapid response to gain control of and suppress inflationary pressures through restrictive monetary policy actions that ultimately enabled inflation expectations to remain anchored. Powell stated, “My confidence has grown that inflation is on a sustainable path back to 2%...The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Alluding to the recent deceleration in the labor market, “The downside risks to employment have increased…The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions…We do not seek or welcome further cooling in labor market conditions.”
Parsing Chairman Powell’s speech at the conclusion of the July FOMC meeting, the aforementioned speech at Jackson Hole, and other communiques expressed and disseminated by Fed officials in the past two months, many tacit implications have been insinuated that at a minimum, one 25 basis point rate cut can be expected at the conclusion of the September FOMC meeting. As of August 31, the interest rate futures market had fully priced in four 25 basis point rate cuts before the end of the calendar year. More imminently, concerning the September meeting, the market had assigned a 100% probability of at least one 25 basis point rate reduction, and a 31.9% chance of two (50 basis points total). It is imperative to keep in mind that in the Fed’s June Summary of Economic Projections (SEP), the rate-setting committee forecasted only one 25 basis point rate reduction for the remainder of 2024. As the balance of risks has shifted in the Fed’s dual mandate, requiring more attention to the health of the labor market, any revisions to September’s SEP will be highly scrutinized.
U.S. Treasury yield curve continued to bull steepen overall. Yields in the intermediate maturities descended the most, “disinverting” key tenor pairs, and ultimately steepening (normalizing) the non-money market tenors of the yield curve.
2-year/10-year spread: -02 basis points
3-month/10-year spread: -121 basis points
2-year/5-year spread: -22 basis points
3-month/30-year spread: -92 basis points
U.S. Treasury Yield Curve Source: Bloomberg
August 2024 Macroeconomic Highlights
Inflation, Expectations, and Consumer Sentiment1:
CPI: 2.9% year-over-year (+0.2% month-over-month); Core CPI: 3.2% year-over-year (+0.2% month-over-month)
PCE: 2.5% year-over-year (+0.2% month-over-month);Core PCE: 2.6% year-over-year (+0.2% month-over-month)
PPI: 2.2% year-over-year (+0.1% month-over-month); Core PPI: 2.4% year-over-year (0.0% month-over-month) Core PPI less trade services: 3.3% year-over-year (+0.3% month-over-month)
Inflation Expectations: 1-year horizon: 3.0%, 3-year horizon: 2.3%, and 5-year horizon: 2.8%
Consumer Sentiment: 67.9 vs. 66.4 in July; Current Conditions: 61.3 vs. 62.7 in July
Consumer Expectations: 72.1 vs. 68.8 in July
Labor Market2: The U.S. economy added 114,000 nonfarm payrolls in July, below the 175,000 expected by economists surveyed by Bloomberg. Notable job gains occurred in health care (+55,000), construction (+25,000), government (+17,000), and transportation and warehousing (+14,000).
U-3 official unemployment rate: 4.3% vs. 4.1% expectation: +0.2% from June 2024.
U-6 unemployment rate (marginalized, part-time workers for economic reasons): 7.8% (+0.4%).
Labor force participation rate: 62.7% (+0.1%); Employment-to-population ratio: 60.0% (-0.1%).
Average hourly earnings for private nonfarm payrolls rose 8 cents to $35.07 (+0.2% month-over-month, +3.6% year-over-year).
Employment revisions: June 2024 slashed -27,000 to 179,000; May 2024 cut -2,000 to 216,000.
Gross Domestic Product (GDP)3: According to the second estimate, real GDP increased at an annual rate of +3.0% in the second quarter of 2024 vs. +1.4% in the first quarter of 2024.
Second Quarter 2024: GDP Price Index: +2.5%; PCE Price Index: +2.5%; Core PCE Price Index +2.8%.
Real disposable personal income: +1.0% vs. +1.3% in the first quarter of 2024.
Personal savings rate as a percentage of disposable income: 3.3% vs. 3.8% in the first quarter of 2024.
Average of Real GDP and Real GDI: +2.1% vs. +1.4% in the first quarter of 2024.
Housing Market4: Existing-home sales increased +1.3% (month-over-month) from June to a seasonally-adjusted annual rate of 3.95 million in July. Month-over-month sales in the Northeast, West, and South advanced +4.3%, +1.4%, and +1.1%, respectively, while sales in the Midwest were unchanged.
Year-over-year sales slumped -2.5%, down from 4.05 million in July 2023.
Total housing inventory registered 1.33 million units, +0.8% from June, and +19.8% from one year ago (1.11 million units). Unsold inventory sits at a 4.0-month supply at the current sales pace.
The median existing-home price for all housing types was $422,600, +4.2% from July 2023 ($405,600), as prices rose in all four major U.S. regions.
Average commitment rate for a 30-year, conventional, fixed-rate mortgage: 6.35%.
New Home Sales: 739,000 (+10.6% month-over-month).
1 Source: Bureau of Labor Statistics (BLS), U.S. Department of Commerce, Federal Reserve Bank of New York – Survey of Consumer Expectations, and University of Michigan Surveys of Consumers
2 Source: Bureau of Labor Statistics (BLS)
3 Source: Bureau of Economic Analysis (BEA)
4 Source: National Association of Realtors (NAR), U.S. Census Bureau, and The Department of Housing and Urban Development
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
Comments