Weekly Market Commentary August 28th to September 1st 2023

Two big items this week came in the form of Personal Consumption Expenditures (PCE) and the monthly jobs report. Regarding the Fed’s battle with inflation, we didn’t get a knock-out blow but the data showed continued growth. In the jobs report, Non-Farm Payrolls for August came in at 187,000 jobs created, slightly higher than expected which is usually a good thing. But as mentioned here before, we are in an era where lukewarm may be better than good. June and July’s reports were revised considerably lower so all-in-all, labor is showing signs of cooling. This is what the Fed would like to see as they continue to push for lower inflation – that higher interest rates are slowing the economy. The unemployment rate surprised to the upside and came in at 3.8%, but even this jump is kept in check as under 4% is still historically low. Two other employment metrics also showed signs the Fed should be pleased with: the JOLTS Job Openings fell to the lowest level since March of 2021; and Average Hourly Earnings dropped slightly which should both lead to slower consumption.

Speaking of consumption, while Personal Income dropped for the month, Personal Spending kept up its recent torrid pace. The August release came in at +0.8% when +0.7% was expected; and July’s was revised up to +0.6% showing the continued confidence consumers have been showing month after month. On the inflation side, the month-over-month PCE Core Deflator came is at an as-predicted +0.2% and the year-over-year number was 4.2%. While 4.2% is still too high for the Fed, the recent monthly numbers continue to show that they are slowly winning the battle.

Two final things to mention are GDP and manufacturing. The revised second quarter GDP came in at 2.1% (down from 2.4%). This was a rather large downward revision, but anything between 2-3% generally shows the economy firing on all cylinders. Last up is the Institute of Supply Management’s (ISM) Manufacturing Survey. We received better than expected results but manufacturing is still in contractionary territory as consumers continue to focus on the services sector, such as travel and hospitality, and less on manufactured goods.

In the financial markets, all three stock indices were up for the week. The S&P 500 rallied to 4,516, up +2.5%; the Dow Jones was up 1.4%; and the big winner was the NASDAQ which was up 3.2%. In the fixed income markets, shorter yields rallied with the 2-Year U.S. Treasury closing at 4.88%, the 10-Year dropping to 4.18%, and the 30-Year basically flat at 4.30%.

Next week’s key economic releases include Factory Orders and the ISM Services Index. A number of key Fed speakers also will be revealing their thoughts at different venues which will provide more insight into upcoming Fed deliberations.