Stocks are heading lower in August as September kicks off with the jobs report
With just one more week left in August, investors will wrap up what has been a pessimistic month with more jobs data and macroeconomic reports that could illuminate the way forward for monetary policy. Stocks are heading for a mixed close on Friday. This week, traders digested hawkish comments from Federal Reserve Chairman Jerome Powell, who in his speech in Jackson Hole, Wyoming, warned that there could be more rate hikes to come. They’ve also absorbed the blowout from Nvidia, the main beneficiary this year of increased interest in AI. The Nasdaq Composite, dominated by technology stocks, ended three straight weeks of losses on Friday, as did the S&P 500. Meanwhile, the Dow Jones Industrial Average is the only major average to post its second consecutive losing week. Next week, there could be more positive news for the markets with the release of personal consumption expenditures, a key measure of inflation, on Thursday, and the August jobs report due on Friday. “We think the Fed will continue or eventually find out that we’re in a significantly accelerated job market, and that will allow them not to raise interest rates anymore. That’s bullish for the market,” said Jay Hatfield, CEO of Infrastructure Capital Management. . “So we will play next week as somewhat bullish.” Regardless, the major averages are set to close out a losing month as higher yields and Fitch Ratings’ cuts weighed on stocks this month. The Dow Jones Industrial Average lost more than 3% in August. The S&P 500 is down about 4%. Meanwhile, the Nasdaq Composite suffered the worst performance of the indices. The technology-heavy index fell more than 5%. Expectations of easing The August jobs report due for release on Friday, September 1, is expected to show that US non-farm payrolls will expand by 175,000 this month, according to economists polled by FactSet. That would be down from July, when the US economy expanded at a weaker-than-expected rate of 187K. Many investors will focus particularly on the service sector. “More cooling in the labor market and services sector,” said Brian Ellis, portfolio manager at Morgan Stanley Investment Management. “This is really important to continue to make progress on the inflation front.” The labor report will be preceded by the July personal consumption expenditures (PCE) report on Thursday. The Fed’s closely watched measure of inflation rose 0.2% in June. That month, the headline inflation rate was the lowest since March 2021. If both reports show declining inflation, that could show that the Fed is much closer to the end of the tightening cycle. That would be a boon for investors, especially after Powell, in his speech in Jackson Hole, Wyoming on Friday, reiterated his tough anti-inflationary stance and indicated that there could be more rate hikes to come. “Although inflation has come down from its peak – a welcome development – it is still very high,” Powell said in his speech. “We stand ready to raise interest rates further if appropriate, and intend to keep policy at a constrained level until we are confident that inflation is moving sustainably toward our target.” No more hiking? In fact, many investors are speculating that the Fed may have finished raising interest rates here as policy makers await the effects of higher rates on the real economy. Over the past year, the central bank has raised the funds rate to a target range of 5.25% to 5.5%. “We think the Fed is probably done here,” said Brian Ellis of Morgan Stanley. “We think that growth and inflation will continue to slow as we see monetary policy work its way into the system. And I think the Fed knows there’s a policy lag, and I think that’s especially true of the tightening cycle.” “So, you know, there’s a higher bar for them to tough it out further,” Ellis added. He said he expects a soft landing for the economy. According to the CME Fedwatch tool, the probability of a Fed pause in September is about 80%. Meanwhile, in November, traders are betting on a roughly 46% chance that the central bank will raise rates at that time. However, some market participants doubt that the Fed will cut rates anytime soon even if it has finished – or is about to finish – raising rates. They noted that inflation remains well above the central bank’s 2% range. “I don’t think cuts are on the table anytime soon,” said Ben Kirby, co-head of investments at Thornburg Investment Management. “And having burned out, having miscalculated in the last couple of years, I think they will likely err on the side of caution to make sure that inflation is really wiped out before they start to reinstate stimulus.” Bond Yields Rise Next week will be the last week before the Labor Day holiday, after which traders will be back at their desks after the summer away. Investors turn the page on a pessimistic month for stocks in August, but September is also a historically bad month for stocks. In fact, traders expect higher bond yields to continue to compete with equities in the coming month. Increasingly, investors are looking for income opportunities as they deal with the possibility of higher interest rates for a longer period. August was the month when bond yields went up, and investors and stock markets backed off saying, “Wait a minute, if I can have a cash yield of 5%, that actually competes with my equity allocation. And so, I might need to “reduce my stock allocation and kind of lock in the 5%,” said Kirby of Thornburg. “As we go into September, that strength of investors continues to say, ‘I want to take a risk-free 5%’ rather than the potential 8% or 9% in equities, and I think that can certainly continue kind of throughout the year.” . He added: Next September. Next week calendar Monday Aug 28 10:30 am Dallas Fed (Aug) Tue Aug 29 9 am FHFA House Price Index (Jun) 9 am S&P/Case-Shiller comp.20 (Jun) 10 am Consumer Confidence ( Aug) 10 a.m. JOLT Job Opportunities (July) Earnings: Catalent, Best Buy, JM Smucker Co., Hewlett Packard Enterprise, HP Wed Aug 30 8:15 a.m. ADP Employment Survey (Aug) 8:30 a.m. GDP Series Price Preliminary Second (Second Quarter) 8:30 a.m. Second Preliminary GDP (Second Quarter) 8:30 a.m. Preliminary Wholesale Inventories (July) 10 a.m. Pending Home Sales (July) Earnings: Salesforce, Costco Thursday, Aug. 31, 8:30 a.m. Continuing Unemployment Claims (19/8) 8:30 am Initial Claims (26/8) 8:30 am Core PCE Deflator (Jul) 8:30 am PCE Deflator (Jul) 8:30 am Consumption Expenses Personal (July) 8:30 a.m. Personal Income (July) 9:45 a.m. Chicago PMI (Aug) Earnings: Hormel Foods, Dollar General, Campbell Soup, Broadcom Fri, Sept. 1 8:30 a.m. August Jobs Report (Aug ) 9:45 AM Markitt Final Manufacturing PMI (Aug) 10 AM Construction Spending (July) 10 AM ISM Manufacturing (Aug)
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