8/09/24: Market Volatility Persists Amid Economic Concerns

Following last week's weak employment report, financial market volatility continued, driven by persistent economic concerns, central bank actions, and global market reactions. The turbulence began in Japan, where the Bank of Japan's decision to raise interest rates for the first time in decades caused Japan’s Nikkei 225, a key stock index, to plummet by 12.4%, marking its worst one-day drop since 1987. Despite this sharp decline, the market recovered much of its losses by the week's end, though the shock reverberated across global markets, including Europe and the United States. However, the impact on U.S. markets was more subdued.

In the U.S., global market instability resulted in a slight decline in stocks for the week, with the S&P 500 falling by less than 1%. However, bonds offered stability as investors turned to U.S. Treasury bonds for safety, leading to their appreciation. As the week progressed and fears subsided, Treasury yields increased, with the two-year and ten-year yields reaching 4.02% and 3.93%, respectively, as of this morning.

The U.S. economic landscape remains mixed. The Institute for Supply Management's index showed a slight expansion in the services sector for July, following a contraction in June. This suggests that while sectors like entertainment, recreation, and food services are growing, the overall pace of expansion is modest. Meanwhile, the manufacturing sector continued to struggle, with the ISM manufacturing index reporting its lowest reading in eight months last week.

U.S. consumer borrowing rose in June, but revolving credit, including credit card balances, saw its largest decline since early 2021. This signals a growing caution among consumers, particularly as wage growth slows and the personal savings rate trends near the low end of the historical range. Economists are increasingly concerned about the sustainability of this reliance on credit, especially with high interest rates.

Labor market data was positive but mixed. Initial unemployment claims fell by 17,000, marking the most significant decrease in nearly a year and indicating some resilience. However, this encouraging news was overshadowed by the previous week's disappointing jobs report, which revealed a slowdown in hiring and an increase in the unemployment rate.

Looking ahead, markets will watch upcoming economic data, particularly inflation reports at the producer level and housing market trends. The Jackson Hole Economic Policy Symposium, scheduled for August 22 to 24, will be a key event as global central bank officials are likely to provide insights into future monetary policy. The anticipated moderation in inflation, combined with this week’s volatility and last week’s disappointing employment data, supports the view that the Federal Reserve may begin lowering interest rates at their September meeting, with the pace and extent of easing depending on future data.

Next Week:

NFIB Small Business Optimism, Producer Price Index, Consumer Price Index, Empire Manufacturing, Retail Sales, Initial Jobless Claims, Industrial Production, Housing Starts, Building Permits, University of Michigan Sentiment Index

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