Inclusive of today’s jobs report, the market digested a significant amount of top-tier data this week. The U.S. economy added 187,000 jobs in August, higher than market expectations of 170,000, but the June and July payroll reports were revised significantly lower by 110,000. These downward revisions along with today’s report placed the 3-month moving average at a benign 150,000. The unemployment rate increased to 3.8% which was primarily a result of an up-tick of people coming back into the labor force. The labor participation rate increased to 62.8%, the highest level since February of 2020. The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons increased to 7.1% from the prior month at 6.7%. The report also reflected lighter than expected wage gains on a month-over-month basis at 0.2%, but year-over-year earnings were in-line with expectations at 4.3%. Employment data released earlier in the week was consistent with today’s weaker than expected labor report. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) declined to 8.827 in July from 9.165 million in June. This marked the sixth decline in the last seven months and the 8.8 million job openings number is the lowest in over two years. The ADP report released on Wednesday reflected private employers added 177,000 jobs in August, below the Bloomberg Survey expectations of 195,000 and significantly below the revised total of 371,000 in July. Despite this week’s data reflecting that the US employment picture is showing signs of moderating, it’s important to note that by historical standards unemployment remains very low and according to the JOLTS survey, there are approximately 1.5 job openings per available worker.
Additional data released this week included an important gauge of inflation. Both the headline Personal Consumption Expenditures (PCE) Index and the Federal Reserve’s preferred measure of inflation, the Core PCE Index (excluding food and energy), came in as expected in July, with both measures increasing 0.2% month-over-month. The headline index rose 3.3% and the core index 4.2% year-over-year, in-line with consensus expectations. Personal spending remained robust at 0.8% but the personal savings rate decreased to 3.5% from 4.3% in July.
The S&P CoreLogic Case-Shiller 20-City Index was up 0.92% month-over-month but down 1.17% from last year. It is important to note that the recent run up in mortgage rates won’t be reflected in this report until two months from now. According to Freddie Mac, a 30-year fixed rate mortgage averaged 7.18% as of August 31st.
Consumer Confidence fell more than expected in August as respondents expressed negative views on the labor market and concerns regarding inflation expectations. The Conference Board’s index fell to 106.1 from a downwardly revised 114 in July. A lower percentage of respondents said that jobs were “plentiful” while a greater percentage said that jobs were hard to get. Also this week, the second estimate of second quarter 2023 GDP growth was revised downward to 2.1% from 2.4%. The revision lower was primarily due to a moderation of business investment which more than offset an increase in consumer spending. Historically low unemployment, wage growth and savings built up during the pandemic has supported consumer spending at a level to keep economic growth intact but there are signs the consumer is beginning to show signs of stress.
The Institute for Supply Management (ISM) manufacturing index rose to 47.6 in August from 46.4 the prior month. In light of this higher-than-expected number as well as progress in reducing unsold goods, the manufacturing sector is showing signs of stabilizing. Nevertheless, the reading of 47.6 remained below 50.0 for the tenth consecutive month indicative of contraction in the manufacturing sector.
The softer economic data this week resulted in Treasury yields moving lower with the 2-year treasury yield down 20 basis points to 4.86% after starting the week at 5.06%, and the 10-year down 5 basis points to 4.17% as of Friday morning. The yield inversion between the 2-year and 10-year treasury narrowed, ending the week at approximately 69 basis points. Market participants will have fewer economic releases to digest next week but data includes Durable Goods Orders to be released on Tuesday and the ISM Services index on Wednesday. Following the significant amount of economic data released this week, the Chandler team believes the Fed is likely to pause at their upcoming meeting later this month but will keep their optionality open relative to the incoming data. The Fed’s ultimate question remains; is policy restrictive enough to keep inflation on the desired path of deceleration, but not too restrictive to ultimately result in pushing the US into a recession? A successful outcome will remain difficult for the Fed to successfully navigate.
Next Week:Factory Orders, Durable Goods Orders, S&P Global US Services PMI, ISM Services, Federal Reserve Beige Book, Nonfarm Productivity, Household Change in Net Worth, Consumer Credit
Copyright © 2023. All Rights Reserved
© 2023 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.