Week in Review: August 2, 2024

August 5, 2024

Recap & Commentary

Markets ended the week sharply lower on concerns that the economy may be weaker than it appears. A confluence of weaker-than-expected manufacturing data, initial jobless claims, and the July employment report resulted in the S&P 500 shedding 3.2% over the course of Thursday and Friday, its largest two-day selloff since March 2023. The selloff was even sharper for the tech-heavy NASDAQ which ended the week in correction territory, down 10% from its record high in early July. In response to the selling pressure, investors sought the relatively safety of bonds, which enjoyed their best week since March 2020, and second-best week since 1988, benefitting from both economic concerns as well as expectations the Fed will cut rates more aggressively in September than previously expected. Market expectations for a 0.50% rate cut in September, which stood at 6% a month ago and were still just 12% a week ago, ended the week at 75%, showing a dramatic shift in response to the week’s data.

As expected, the Fed left rates unchanged at its July FOMC meeting. In response to a question at his press conference afterwards regarding the possibility of a September rate cut, Fed Chair Jay Powell stated any decision would consider whether “…the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market. If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”  Powell stressed, however, that nothing is predetermined and ultimately the Fed will base any policy actions on incoming data.

Economic Commentary

July’s employment report, arguably consistent with a cooling, not collapsing, labor market, nonetheless fueled concerns that a broader slowdown might be imminent, if not already underway. Nonfarm payrolls added 114K jobs during the month, well below the expected 176K, and down from June’s 179K. That marked the slowest pace of job creation in three months and second slowest since December 2020. Despite the gains, unemployment rose 0.2% to 4.3%, its highest level since October 2021, as 420K individuals entered the labor force in search of work. In another sign of cooling conditions, annual average hourly wage growth slowed from 3.8% to 3.6%, its slowest pace since May 2021.

Manufacturing activity shrank more sharply than expected in July, falling to its lowest level in eight months, according to industry group ISM. The weakness was broad based as new orders, backlog orders, production, and employment all contracted. Despite the contraction, ISM noted that manufacturing remains at a level consistent with overall economic expansion.

Initial weekly jobless claims rose 14K to 249K, an 11-month high. Though the weekly data is prone to volatility, the rise, together with the disappointing ISM data and July employment report was viewed as another sign that economic activity and labor markets might be cooling faster than previously thought. Continuing claims also rose in another potential sign of cooling conditions.

Of Note

Through Friday, 75% of S&P 500 companies had reported 2Q24 earnings. Thus far, 78% have beaten their consensus estimate. According to industry group FactSet, consolidated earnings growth for the quarter is expected to be 11.5%.

Market Indices   (As of 08/02/2024)

• ISM Services
• Consumer Credit
• Weekly Jobless Claims