Global equities took it on the chin early in the week and again on Friday as global growth worries and angst over the timing of the Fed’s upcoming rate hike remain center stage. During the week the S&P 500 lost 3.4% and is now down 5.4% YTD on a total return basis. Overseas most of Europe’s major markets were off three or more percent and Japan was down about 5%. China’s Shanghai Composite was down only 2.2%, but their market was closed on Thursday and Friday in commemoration of the 70th anniversary of the end of WWII.
Treasury bond yields closed Friday within five basis points of the week prior. The ten year Treasury note yields 2.13% while the 30 year bond is at 2.89%.
The US unemployment rate fell more than expected to 5.1% in August despite a fewer than expected 173k jobs being created (expectations had been for +217k). With the jobless rate at a 7 year low, the U.S. is as near as makes no difference at full employment. That means a pick-up in inflation should be just around the corner as employers compete for an ever dwindling pool of available workers. As a result, this job number complicates things for the Fed’s FOMC meeting in two weeks. They want to begin raising rates but the market turmoil has some FOMC members getting cold feet.
Other US data out this week was solid. Bloomberg headlined the Fed’s Beige Book as “The US economy expanded across most regions as tighter labor markets boosted wages for some workers.” Small business hiring was robust and the service sector is doing well. Productivity jumped in the second quarter to a healthy 3.3%, but is still up only 0.7% YoY. Manufacturing is softening here and across the globe – especially in China.
Meanwhile, Mario Draghi offered that the European Central Bank might do more to help the economy over there given the recent spate of turbulence across the financial markets. He noted that the risks to growth in Europe remains to the downside and that inflation may turn negative in the coming months. Inflation is just 0.2% YoY. The unemployment rate in the Eurozone did tick down to 10.9%, but is obviously still very high.
The oil roller coaster ride continued. WTI oil hit a low of $38 early last week, closed this Monday at $48 bucks, sold off to $44 on Tuesday, and ended Friday at $46. Ed Yardeni says: “Over the past 12 months through July, world oil demand rose to a record 94.6 million barrels per day, and is up 1.9% YoY, from just 0.8% a year ago. So why are oil prices so low? There’s too much supply. Our ratio of global oil demand to world oil supply fell to 1.01 during July, the lowest since February 2007.”
IMF downgrades forecast. Managing Director Christine Lagarde said “Overall, we expect global growth to remain moderate and likely weaker than we anticipated last July.” The IMF in July forecast global growth at 3.3 % this year, slightly below last year’s 3.4%.
Congress returns from recess September 8 and completion of what will be a contentious federal budget is on the agenda. September 30th is the deadline for passing a Continuing Resolution and without action will result in a government shutdown. The CBO released its latest estimate for the debt ceiling last week stating that Congress has until mid-November to early December to raise the limit for US debt issuance. Expect drama, brinksmanship, and policy uncertainty coming out of Washington in the fall. Just what the markets need right now!
Ed Yardeni on structural problems. “They include too much debt accumulation that is weighing on both demand and inflation, thus severely limiting the stimulative powers of the ultra-easy monetary policies of the major central banks. Easy money is boosting excess supply by enabling zombie producers to stay alive. Demographic trends around the world show declining fertility rates, causing many populations to shrink, while older people are living longer. That increases the economic burden of social welfare states by increasing the amount of public debt and keeping tax rates high. Technological innovations are always disruptive, and seem to be increasingly so these days, especially as robotics and artificial intelligence proliferate in the workplace. Secular stagnation has a negative connotation and sounds bearish for stocks. However, it actually increases the likelihood of a secular bull market in stocks. That’s because bear markets are caused by recessions, which were usually preceded by inflationary booms in the past. Our thesis, quite simply, is that if there’s no boom, there’s no bust. The question is whether secular stagnation could degenerate into a bust after all by itself. We don’t think so.”
ISI’s Krishna Guha had a long piece on The Shadow of the Zero Bound where he argued that central banks need to keep rates low for longer as the global economy is fragile and still recovering from the 2008 debt crisis. Economies are not strong and are still vulnerable to shocks as monetary policy at zero bound provides little room to ease in a crisis. Better to see strong economic momentum and risk inflation (a no show so far) than to hike rates now. He thinks we can be at the zero bound for several more years. Stock market equity risk premiums should be elevated in this environment (stocks already high and unlikely to post major gains). This is the “policymakers have run out of bullets” argument that has reared its head recently.
I am off to wedding in Dallas and then some R&R. Enjoy Labor Day! You’ll be in Nick’s capable hands next week.
Jeff Pantages, CFA
Chief Investment Officer