Thursday Sep 5 2024 12:24
5 min
Markets are in a fragile state this week, but we are we seeing some stabilisation. Markets have priced in deeper and swifter interest rate cuts by central banks after job openings data in the US added to worries about a slowdown in the global economy.
The front end moved a lot, with 2-year yield down about 12bps to almost 3.75% — the lowest since May 2023. The spread between the 2-year yield and Fed funds target is at the widest since 2008, which I believe did not turn out to be that good. The yield curve also uninverted, flattening out such that the 10-year yield rose above that of the 2-year for the first time since Jun 2022.
I don’t necessarily think this is a good thing – it may be pointing to a Federal Reserve policy error. While people check whether Jay Powell is lucky or good, maybe they should instead wonder whether he’s not screwed it up.
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The worry is that the Federal Reserve has stayed too tight for too long and a “soft landing” may be behind us. Markets have raised bets for a 50-basis-point interest rate cut in a couple of weeks. The US nonfarm payrolls report tomorrow is the key to it all — and I fail to see how it can really do much to change the narrative at this stage – we are not about to get a thumping number. A 50 basis point cut will then look panicky, making markets worry more.
Once the Fed cuts rates, we can see further choppiness all the way into the November presidential election, at which point, depending on the outcome, I’d expect some unclenching and risk to come back on into the year-end.
TS Lombard said it “was not too worried”:
“Fed cuts, still resilient hard data in cyclical sectors, a dearth of serious macro-financial imbalances, and support from earnings all suggest the bull market is not on the brink. .. we are not too worried.”
Job openings in July tumbled by 237,000 to 7.673 million. That was the lowest since February 2021 and much worse than the 8.09 million expected. June job openings were revised lower from 8.230 million to 7.910 million. Big drop in the construction sector, which is a cyclical indicator.
Chatter about OPEC delaying a planned production increase helped to lift crude prices a bit after they’d sunk to their lowest in over a year.
Oil is our best proxy right now — the commodity has tried to stabilise, but we may potentially be looking at potentially deeper losses.
The Bank of Canada made its third straight 25 basis point rate cut and said that "...if inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate."
The ISM PMI got all the attention. but check this from the S&P Global US manufacturing PMI.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said (emphasis my own):
“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter. Forward looking indicators suggest this drag could intensify in the coming months. [...]
Slower than expected sales are causing warehouses to fill with unsold stock, and a dearth of new orders has prompted factories to cut production for the first time since January. Producers are also reducing payroll numbers for the first time this year and buying fewer inputs amid concerns about excess capacity. [...]
The combination of falling orders and rising inventory sends the gloomiest forward-indication of production trends seen for one and a half years, and one of the most worrying signals witnessed since the global financial crisis. [...]
Although falling demand for raw materials has taken pressure off supply chains, rising wages and high shipping rates continue to be widely reported as factors pushing up input costs, which are now rising at the fastest pace since April of last year”.
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