“Find strength in what remains behind.” – William Wordsworth, Ode to Immortality
Another week of big swings has raised levels of uncertainty all around. Do we buy this correction, or sell it? Does it mean something more, something less, or does it mean anything at all? Even CNBC has begun to wonder if the end of the business cycle is at hand.
August is supposed to behave the way March is supposed to behave weather-wise: come in like a lion, go out like a lamb. In the event, the month saw prices take a beating and leave all the averages down on the year. A spectacular stab at marking up oil prices for the month led to one of the biggest one-day rallies ever last Monday, followed immediately by more selling that largely wiped out the gains. The conclusion appears to be that for now, the only certainty is uncertainty.
What does it mean to you, dear reader, hopefully refreshed after a long Labor Day weekend? It’s no sure thing, but I still expect the markets will try to reclaim the highs before the end of the year. It won’t be on earnings, though, so the impetus will have to come from central bank moves and ruminations therein, a quieter flow of headlines out of China, some helpful calendar positioning and maybe some good old trading speculation.
I am not one of the ones who will tell you that all is well so pay no attention to the bleeding, but I not going to tell you that it’s all over yet either. We’re getting near the end of the summer, but the end is not quite upon us. We are quite near the end of the business cycle, but that end isn’t quite upon us either; a little bit of luck and prices will reclaim the highs. The August jobs report supported both points – near the cyclical end, yet definitely not at the end. A little more bad luck, though, and markets could get into bigger trouble. Let the buyers beware.
The Economic Beat (in holiday time)
The jobs report kept its usual status as report of the week. Some pundits described it as a “Goldilocks”-type report, not too or not too cold, and while they were probably doing so in an effort to get the market to look on the bright side, in some ways the description was accurate – or would have been if the business and market cycles were at different points in time.
The headline number of 173K was on the low side of the expectations range and well short of the consensus for about 210K-220K. But the consensus number itself was one of those times when the Street didn’t really believe it, with traders leaning towards a number below 200K. The number was thus no shocker, and was even welcomed by those hoping the Fed might have reason to postpone any rate action. However, the unemployment rate fell to 5.1%, and that number cast a pall over hopes for such inaction.
Like most monthly figures, all of the headline data needs to be taken with a large dose of wait-and-see. The unemployment rate has been distorted by the outsized growth of the not-in-labor-force category (another estimated 261K in August) and historically low participation rates. Although August jobs numbers have been revised substantially upward in recent years, one should definitely not assume that that will be the case again, given that most of the hiring was in leisure and health care while manufacturing reported a contraction (which could reflect more struggles in adapting data to changing automaker summer schedules). June’s upward revision to the adjusted count was revised upward on the strength of a 3K reduction in the unadjusted count. At the risk of giving offense, I will also repeat the remark that we’re near the end of the cycle.
The ISM manufacturing survey was below consensus at 51.1 (50 is neutral), reflecting the fact that most of the regional surveys had been weak. The Chicago purchasing index was about on target at 54.4, but Dallas posted another weak number at (-15.8). The ISM numbers, it ought to be said, are not great leading indicators, but new orders fell sharply in manufacturing, where they are the most sensitive indicator, while in non-manufacturing the headline result was robust (59) but the price index (its most sensitive component) dropped to 50.8. Nothing definitive about the numbers either way. The Fed’s Beige Book didn’t find much that had changed either. Factory orders were up from July, but remain depressed on a year-on-year basis.
Elsewhere, construction was a bright spot (+0.7 with an upward revision to July). Retail sales continue to be soft at the chain-store level.
The week upcoming is a light one domestically, with a holiday Monday and not much else on the calendar beyond the labor turnover (JOLTS) report on Wednesday. Import-export prices are due Thursday and the producer price index gets released on Friday.