Here are the economic and market highlights for the week:
- July’s weak nonfarm payrolls report sent shockwaves through markets on Friday. Hiring slowed much more than expected during the month while the unemployment rate ticked higher for the fourth consecutive month. Businesses only added 114K to the payrolls in July, well below estimates of 185K. Meanwhile, the unemployment rate edged higher to 4.30%, its highest reading since October 2021. While the unemployment rate is not high in absolute terms, the change in rate triggered panic that a recession could be waiting in the wings based on historical patterns. According to the Sahm Rule, if the unemployment rate rises by half a percentage point over the lowest level in the preceding 12 months, the economy is either likely to enter a recession or has already entered a recession. This condition has not occurred at any point outside of the last nine recessions, and the increase in July’s jobless rate was enough to trigger a positive indicator based on the rule. While markets panicked over the reading, the creator of the rule, former Fed economist Claudia Sahm, doesn’t expect an imminent downturn, pointing out that the unemployment rate is moving from a historic low to a more normal rate. As you would expect with falling employment figures, the report also showed that average hourly earnings growth also cooled, increasing 0.20% for the month. This resulted in overall earnings having grown 3.60% from a year ago. Of those jobs that were added in July, they were concentrated in healthcare, construction, and government. Those additions helped offset losses in information technology, financial services, and professional and business services. The three month hiring average is still at a healthy 175K/month range, but the steep drop in July’s hiring woke markets up to the fact that a soft landing is not necessarily guaranteed.
- More bad news came from the manufacturing sector in July. The Institute for Supply Management Manufacturing Index slid to 46.8, down from June’s 48.5. Numbers below 50 signal contraction in the manufacturing sector. This was the index’s fourth consecutive month in contraction, managing to hit an eight-month low. It was a rough report all the way around. The new orders gauge fell 1.9 points to a weak 47.4. The production barometer dropped 2.6 points to 45.9, the lowest level since the economy was shut down in May 2020 at the height of the pandemic. The employment index sank 5.9 points to 43.4, a four-year low. Not even the price index signaled much relief from higher prices as it rose 0.8 points to 52.9. The ISM survey showed demand remains subdued as companies remain unwilling to invest in capital and inventory due to high borrowing costs and other macroeconomic headwinds.
Markets Sell the News
Having spent the first half of the year bidding up the market in anticipation of rate cuts, investors sold the news this week as Fed Chair Jerome Powell acknowledged a September rate cut is very much on the table during his comments at the conclusion of Wednesday’s FOMC meeting. What normally should have been met with elation was instead met with fear as the weakness in this week’s economic data had investors worrying whether the Fed is once again behind the eightball by not having already cut rates. Recessionary fears sent the Dow Jones Industrial Average down a cumulative 1,100+ points on Thursday and Friday. The S&P 500 and Nasdaq Composite Index also slipped 3.18% and 4.68%, respectively. Friday’s sell-off pushed the Nasdaq into correction territory, now down more than 10% from its recent peak. Even Q2 earnings beats from Mag 7 members Amazon, Meta, Amazon, and Apple did little to lift investor sentiment. Instead, investors were focused on the big nonfarm payrolls miss and a deepening contraction in the manufacturing sector. The Federal Reserve’s decision to hold rates steady at a benchmark range of 5.25% and 5.50%, now puts the magnitude of a September rate cut in some contention. Given the quick deceleration in this week’s data, a standard 25 bps cut may be perceived as ineffective while a 50 bps cut could signal that the Fed is more concerned than it has signaled, eroding market confidence once again. The panic over a potential recession had one clear winner – bonds. The U.S. 10-year Treasury yield fell to 3.79% on Friday, its lowest level since December.
Bad economic news is finally being treated as bad news for markets. It has been a quick shift in sentiment over the past two weeks, having turned from investors hoping to see weakness in each sequential economic report to now fearing where it may lead. Despite slowing momentum, it should not be overlooked that the economy still grew at 2.8% clip last quarter, albeit that is backwards looking. In making the soft-landing case throughout this year, bulls have relied on the strong jobs market to prop up consumer spending long enough to allow slower acting rate cuts to percolate through the economy and avoid a recession. The sharp drop in July’s hiring was a jolt, suggesting businesses are beginning to sour on hiring faster than anticipated. Since the consumer constitutes two-thirds of GDP, investors are right to be concerned, but while the Sahm Rule has been a perfect recession predictor historically, with just nine recessions since 1960, the sample size is insignificant in statistical lingo. Still, the jobs data provides the best evidence yet that the economy has cooled significantly, which now puts the Fed in a race against time should July’s employment report be something more than an outlier.
The Week Ahead
- ISM Services
- Trade Deficit
What’s New in the Paris 2024 Games
The opening week of the 2024 Summer Olympics has been a whirlwind of excitement and history-making competition. There are just five sports that have been part of every Summer Olympics. These include athletics (track and field events), cycling, fencing, gymnastics, and swimming. This summer, there are 45 sports included in the Summer Games, including several new events. The International Olympic Committee determines which sports to include or exclude, and the host city may also play a role in those decisions. Olympic watchers are in for some interesting new events in Paris, including:
Breaking, commonly known as breakdancing, will make its debut. The competition includes 16 men and 16 women (known as “B-Boys” and “B-Girls”) who will compete in best-of-three, one-on-one contests of approximately one minute. Breaking is unique in that the B-Girls and B-Boys don’t know the music ahead of time — they must improvise their moves to the beat. The competitors will showcase a range of techniques including top rock (standing footwork), down rock (moves on the floor), power moves (twists and spins), and “freeze” moves. When one breaker finishes their round, their opponent instantly begins their routine in a battle format. It’s basically a dance off.
A panel of judges score the competitors on creativity, personality, technique, variety, performativity and musicality. Performativity and creativity hold the most weight (60%), and the other categories account for the other 40%.
Viewers can watch the women’s breaking competition on Friday, August 9th, and the men’s on Saturday, August 10th. The sport is not scheduled to be part of the 2028 Olympic Games in Los Angeles.
Kayak cross is a new event added to the Olympic program where four kayakers will race against one another at the same time as they navigate a minimum of six downstream gates and two upstream gates. In a defined zone of the course, all athletes are required to complete a kayak roll, a 360° rotation that includes their head going under the water. Kayak cross begins Saturday, August 3rd.
Marathon race walk mixed relay is new this summer, replacing the individual 50-kilometer event. The race includes 25 teams composed of one male and one female athlete per team in four stages of approximately 10 km each, alternating between each athlete. The event takes place on Wednesday, August 7th.
Boxing added a new women’s weight class and cut a men’s weight class to bring the total to seven male weight classes and six female weight classes.
Several sports that made their debut at the Tokyo Olympics in 2021 are returning to Paris, including surfing, skateboarding, sport climbing, and 3×3 basketball. The surfing competitions are taking place in Tahiti in French Polynesia and have been delayed several times due to a storm system creating dangerous conditions. The competition must conclude by August 5th so organizers and athletes are hoping the surf improves over the weekend.
As of Friday morning, the U.S. leads in the overall medal count, while China leads in gold medals. Below is the breakout:
1. USA — 41 (9 gold, 17 silver, 15 bronze)
2. France — 31 (9 gold, 11 silver, 11 bronze)
3. China — 27 (13 gold, 7 silver, 7 bronze)
4. Great Britain — 25 (9 gold, 8 silver, 8 bronze)
5. Australia — 19 (8 gold, 6 silver, 5 bronze)
T6. Japan — 17 (8 gold, 3 silver, 6 bronze)
T6. Italy — 17 (5 gold, 8 silver, 4 bronze)
8. South Korea — 16 (7 gold, 5 silver, 4 bronze)
9. Canada — 9 (3 gold, 2 silver, 4 bronze)
10. Netherlands — 8 (4 gold, 2 silver, 2 bronze)
T11. Germany — 7 (2 gold, 3 silver, 2 bronze)
T11. Brazil — 7 (1 gold, 3 silver, 3 bronze)
T13. New Zealand — 6 (2 gold, 3 silver, 1 bronze)
T13. Romania — 6 (2 gold, 3 silver, 1 bronze)
T15. Sweden — 5 (1 gold, 2 silver, 2 bronze)
T15. Spain — 5 (1 gold, 1 silver, 3 bronze)
T15. Switzerland — 5 (1 gold, 1 silver, 3 bronze)
T18. Hong Kong — 4 (2 gold, 2 bronze)
T18. Ireland — 4 (2 gold, 2 bronze)
T18. Hungary — 4 (1 gold, 2 silver, 1 bronze)
T18. South Africa — 4 (1 gold, 1 silver, 2 bronze)
T18. Greece — 4 (1 silver, 3 bronze)
T18. Poland — 4 (1 silver, 3 bronze)
T24. Croatia — 3 (1 gold, 1 bronze)
T24. Georgia — 3 (1 gold, 2 silver)
T24. Belgium — 3 (1 gold, 2 bronze)
T24. Kazakhstan — 3 (1 gold, 2 bronze)
T24. Uzbekistan — 3 (1 gold, 2 bronze)
T24. Israel 3 (2 silver, 1 bronze)
T24. Mexico — 3 (2 silver, 1 bronze)
T24. India — 3 (3 bronze)
T32. Azerbaijan — 2 (2 gold)
T32. Guatemala — 2 (1 gold, 1 bronze)
T32. People’s Republic of Korea — 2 (2 silver)
T32. Kosovo — 2 (1 silver, 1 bronze)
T32. Turkiye — 2 (1 silver, 1 bronze)
T32. Ukraine — 2 (1 silver, 1 bronze)
T32. Moldova — 2 (2 bronze)
T32. Tajikistan — 2 (2 bronze)
T40. Argentina — 1 (1 gold)
T40. Ecuador — 1 (1 gold)
T40. Serbia — 1 (1 gold)
T40. Slovenia — 1 (1 gold)
T40. Fiji — 1 (1 silver)
T40. Mongolia — 1 (1 silver)
T40. Tunisia — 1 (1 silver)
T40. Austria — 1 (1 bronze)
T40. Egypt — 1 (1 bronze)
T40. Portugal — 1 (1 bronze)
T40. Slovakia — 1 (1 bronze)