Monthly Unemployment data was released today showing August job growth of 315k, which is strong enough to maintain an expanding economy, but with the previous months being revised down, the number was softer than it appeared. Another good sign was the small drop in wage growth, which has been a big contributor to more discretionary cash and therefore more inflation. The markets liked the data and were focused more on the overall Unemployment Rate, which moved from a historic low of 3.5% to 3.7%. These are the areas the Fed wants to see constructive news in line with recent statements from Fed Chairman Powell, who referred to the “pain that would be felt in household and businesses” that would be needed to bring inflation down. Not a pretty scenario, increasing unemployment could likely push the Fed to raise rates less aggressively than the markets seems to have been suggesting. But, in my opinion, it’s the impact on consumer sentiment that I’m going to focus on, because if the labor market participants are even slightly concerned about job stability, that will directly impact spending, and less spending is the true enemy of inflation.
The rest of the data suggested continued expansion as well as the recent release of ISM Manufacturing PMI remained at 52.8 (above 50 is expansionary), and worth noting, Manufacturing Employment showed a healthy increase in August as well to support that assumption. Although the overall economy is still sector sensitive, the notion that a recession is upon us is, in my opinion, premature, and the unemployment data supports that notion. Overall, I would say that the Fed sees this number and remains content with its aim to aggressively raise rates, content, but not happy yet. That would be necessary to slow the Fed down.
By the end of the day the broad indexes started to give up early gains and move lower, leaving the week, a weak one. It’s worth noting that many of the technicals that I use to track positive and negative momentum have declined to nearly oversold. This is leaving me constructively neutral, and numerous changes to the portfolios have usually consisted of some profit taking and adding to new names. I’m more inclined to pay attention to less defensive sectors, as the economy may not be in a recession, but the markets, exercising their predictive nature, will likely, as through history, begin their rise when that happens, not after.
On September 14th the Consumer (CPI) and Producer (PPI) prices data will give a better picture of where inflation is. The recent increase in the yield of the 10yr Treasury to over 3.25%, not seen since 2018, gives room to the Fed to be aggressive if the inflation data doesn’t move lower. This is why the markets will still be captive to uncertain volatility for much of the month. Add to this the disruptions that continue to occur in the energy markets and vigilance is the key to patience.