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Fin-X Weekly 9th September 2024

Brett Careedy
Source: Bloomberg, S&P Dow Jones, MSCI, FTSE Russell, 7th September 2024

Risk sentiment turned negative last week as investors priced a higher risk of a US recession. Short-term bond yields fell ahead of expected monetary easing, and the Treasury curve “uninverted”. Crowded positions in technology names were pared back following news of an antitrust investigation related to Nvidia. 


Australian GDP growth was positive but remained low. The report provided further evidence of a challenging business environment, narrow consumer spending, and a low household savings rate.  


The presidential debate will take place on Tuesday night in the US, before Wednesday’s CPI report. The NAB business and Westpac consumer surveys are due tomorrow, with the monthly Chinese activity data following on Saturday. The ECB is expected to cut rates by a quarter point on Thursday.


Source: Bloomberg, ABS, 7th September 2024

Investor sentiment soured last week as the month’s early data clearly indicated that economic growth is slowing, although the data was just good enough to keep some hopes of a US soft landing alive.


The ISM manufacturing provided the first warning signs with a surprisingly weak new orders number (44.6), confirming that the manufacturing sector is shrinking again after a brief recovery earlier this year.


The Federal Reserve’s “Beige Book” added more gloom, saying: “Economic activity grew slightly in three [of eleven] Districts, while the number of Districts that reported flat or declining activity rose from five in the prior period to nine in the current period. Employment levels were steady overall, though there were isolated reports that firms filled only necessary positions, reduced hours and shifts, or lowered overall employment levels through attrition. Still, reports of layoffs remained rare. On balance, wage growth was modest, while increases in nonlabor input costs and selling prices ranged from slight to moderate. Consumer spending ticked down in most Districts, having generally held steady during the prior reporting period. […] Manufacturing activity declined in most Districts, and two Districts noted that these declines were part of ongoing contractions in the sector".


The American unemployment rate ticked back down from 4.3% in July to 4.2% in August as the number of workers on temporary layoffs declined and the participation rate was steady. However, the weakening hiring trends were visible across a range of reports, echoing the findings in the Beige Book. The +142k new non-farm payrolls in August was below expectations (+165k). The originally published July figure of +114k was also revised down to +89k, with a total of -86k jobs stripped from the last two reports. The ADP report on private payroll additions (+99k) had also been much softer than expected. The ISM manufacturing employment survey remained in contraction (46.0), while the ISM Services index revealed a softer uptick in hiring than expected (50.2). At the same time, the JOLTS report showed a larger drop in advertisements (7673k) than anticipated, although hiring and quits were steady on a seasonally adjusted basis.


Source: Bureau of Labor Statistics

Commenting on the data, Fed. Governors Waller and Goolsbee reinforced Jerome Powell’s Jackson Hole message that the time had come to cut rates. However, they offered some sense that an immediate half-point cut was unlikely despite the market still pricing a roughly even chance of a -0.25% or -0.50% cut. Consequently, shorter-term interest rates fell by more than longer-term rates, with the Treasury yield curve appearing to decisively “un-invert” between the 2yr and 10yr maturities, which has historically been taken as a signal that the US economy is entering recession.


The consensus forecast is for August headline CPI to drop to +2.6% yoy when released on Wednesday this week, while core inflation is expected to remain at +3.2% yoy.


Headline inflation has been helped lower by falling oil prices in recent weeks. Consequently, Reuters reported on Thursday that the OPEC+ group of oil-producing nations had agreed to delay a previously scheduled October increase in production. OPEC+'s planned hike was for 180,000 barrels per day (bpd), which is only a fraction of the 5.86 million bpd of output it is holding back, equivalent to roughly 5.7% of global demand.


As anticipated, the Bank of Canada cut the policy rate from 4.50% to 4.25% last week. The rate was cut from the recent high of 5.00% as recently as June. Canadian unemployment surprised to the upside on Friday, jumping from 6.4 % in July to 6.6% in August.


The Australian economy grew by just +0.2% in the June quarter. The annual figure was +1.0%, slightly above estimates, although growth for the financial year was the lowest since FY 1991-92. Average living standards also continue to decline as GDP per capita was down for the sixth consecutive quarter, falling -0.4% in Q2.


Compensation of employees (COE) increased +0.9% during the quarter and +7.5% for FY 2023-24, squeezing business profits. However, high prices remain a challenge as most of the additional compensation appears to have been diverted to essential spending. Discretionary spending declined, and the household savings rate remained low (0.6%).


Australian shares again outperformed the global averages as the technology sector sold off throughout the week. The initial selling was sparked by a headline that Nvidia had received a subpoena from the Department of Justice related to an A.I. antitrust investigation. The company later confirmed that a conversation had occurred, but no subpoena had been received. The share price was -14% lower over the week.


In other company news, Bloomberg reported that President Biden is preparing to formally block Nippon Steel’s $14.1 billion takeover of US Steel. The share price fell by -18%.


In contrast, Blackstone acquired nine-year-old data centre company AirTrunk for A$ 23.5 billion. Commenting on the size of the deal, the AFR said: “The deal is easily the biggest corporate transaction in Australia this year, and the fifth largest ever after Block paid $39 billion for buy now, pay later group Afterpay in 2021, the $33 billion sale of Westfield to Unibail-Rodamco in 2018, the $32 billion acquisition of Sydney Airport by a consortium of superannuation investors in 2022 and the $26 billion merger of gold miners Newmont and Newcrest last year.”


On Monday, Dow Jones also reported that REA Group was considering a cash and stock offer for the UK property platform Rightmove. No formal offer has been confirmed.


Besides the American CPI report, the ECB is expected to cut rates by -0.25% on Thursday, and the latest Chinese activity reports are due on Saturday. The NAB business and Westpac consumer surveys are due out tomorrow. However, the presidential debate between former President Trump and Vice President Harris, scheduled for Tuesday night in the US, will likely draw the most attention.


FOMC rate decision for 17- 18 September


Source: Bloomberg
Source: Bloomberg


Source: Bloomberg, ISM, BLS, 7th September 2024


Earnings for the week:


Monday - Oracle (ORCL) and Rubrik (RBRK). 

Tuesday - GameStop (GME), Academy Sports and Outdoors (ASO), and Dave & Buster's Entertainment (PLAY).


Wednesday - Manchester United (MANU), Oxford Industries (OXM), and Designer Brands (DBI)..

Thursday - Adobe (ADBE), Kroger (KR), RH (RH), and Signet Jewellers (SIG).


Source: Bloomberg, S&P Dow Jones, MSCI, FTSE Russell, 7th September 2024

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