Key Points
- Major US indices ended week mixed after hitting new highs
- Big miss in August employment likely to push back Fed taper timeline
- Chinese economic data will be scrutinised for further signs of slowdown
US indices ended the week (30 Aug- 3 Sep) mixed after hitting intra-week highs. The tech-heavy Nasdaq Composite closed the week higher by 1.5% touching a new high on Friday, the S&P 500 gained 0.6% while the Dow Jones Industrial Average shed 0.2% for the week.
The 10-year Treasury yield ended at 1.32% on Friday, just above where it was a week ago. The best-performing sectors were led by defensive stocks in real estate investment trusts (REITs), utilities, consumer staples and health care.
Markets had been stretching to reach new highs during the week until Friday’s jobs reports saw US August non-farm payrolls rise by only 235,000, falling two-thirds short of economists’ estimates at 720,000 which paled in comparison to the 1.1 million for July as the Delta variant dealt a huge dent to a number of key sectors.
The resurgence in coronavirus cases has dragged down employment growth while shaking consumer confidence just as Covid relief jobless benefits expire for millions of Americans this month.
Both the leisure and hospitality industry saw no job gains for August with some retailers and restaurants forced to cut back in what was an abrupt drop-off from the average monthly increase of 350,000 positions over the past six months. Evidence of economic softening was also seen in the number of new businesses openings falling by 2.5%, according to the scheduling software company Homebase.
The upshot of the August employment report is that it has likely upended the Fed’s timeline for tapering its monthly bond purchases, bolstering its case to proceed with greater caution. Fed Chair Jerome Powell has stressed the need for more strong jobs data including a narrowing of employment inequality among certain demographics before the US central bank starts to scale back its bond-buying programme that has injected massive markets liquidity.
The general consensus is that the timeline for the announcement of a taper will be pushed back from the monthly Fed committee meeting this month which will keep current accommodative policies for a little bit longer and give the market some comfort as more data is needed to assess how much the virus has impacted hiring and created bumps for recovery.
Other than the path of the Delta variant, other factors that may impact the direction ahead for markets in September include ongoing efforts by the US Congress to pass further infrastructure spending as part of the Biden administration’s Build Back Better plan which also includes the possibility of raising taxes.
Hence, the release of jobless claims on Thursday this week has taken on greater importance after the big miss in the August employment report. Investors will also be looking for clues at whether it was a temporary blip as well as inflation-related data such as the producer price index (PPI).
Other data to be released in the shortened trading week due to the Labour Day holiday on Monday include weekly mortgage applications, second-quarter services and wholesale trade while a parade of Fed presidents will also be speaking at events this week including the Dallas Fed Town Hall.
Meanwhile, it should be noted that markets had previously neared all-time highs prior to the past last five Labour Day but had seen the post-Labor Day week being the worst for September. Looking ahead, it is likely that the US market will trade sideways to moderately higher as there isn’t much bearish data in the near term.
Some investors are in fact of the view that a slowdown in earnings and economic growth will still be positive for equities by helping to moderate sky-high valuations. The delay in the Fed’s move towards tightening may also keep markets in a Goldilocks environment though risks remain on the virus and inflation fronts as well as from supply chain disruptions.
Key Asian data this week include China’s CPI & PPI for Aug (Bloomberg estimates: CPI to rise 1.1% year-on-year in August from 1% in July, while the PPI may ease to 8.9% from 9% in July) as well as trade numbers and PPI from Taiwan.
Investors will be looking for further signs of whether China’s growth is losing momentum after last week’s key manufacturing gauges – the Caixin manufacturing purchasing managers’ index (PMI) for the private sector and the official manufacturing PMI – both showed sharp declines.
The Caixin survey of factory activity had come in at below the 50-mark at 49.2 in August, the first time since April 2020, while the official PMI fell just short of a contraction at 50.1, its weakest reading since February last year.
The Chinese economy is also grappling with weaker export demand, high prices of raw materials and a property sector reeling from debt-ridden issues with key developers, notably Evergrande which saw trading of its bonds halted temporality on Friday after huge selloffs.
Some China watchers expect policymakers to further ramp up monetary and fiscal stimulus to arrest a deteriorating macroeconomic backdrop. The People’s Bank of China had recently cut the reserve requirement ratio (RRR) for banks in July to inject more liquidity into the financial system.
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