Wall Street wobbled amid September Fed rate cut suspense

·         Also, Gold was under stress as the Israeli PM is under huge public pressure for an immediate ceasefire, but recovered on increasing Russia-Ukraine tensions

·         Nvidia slid on DOJ antitrust regulatory issues; NQ tumbled; but later Nvidia denied receiving any DOJ subpoena notice

·         Overall S&P and ISM MFG PMI data indicates rising input cost inflation, while JOLTS job openings data indicate Goldilocks nature of US labor market

After the Labor Day holiday Monday, on Tuesday, Wall Street Futures stumbled on suspense about the Fed’s rate cut probability in September as July core PCE inflation stalled. The was expecting a -50 bps cut in September followed by another -50 in December for a cumulative -100 bps rate cut in 2024. But overall core inflation data and unemployment numbers may be showing that Fed may continue patience till at least Dec’24 if Aug’24 unemployment figure does not surge above 4.3-4.5% or even fall towards 4.0%.

And even if the Fed chooses to launch the next rate cut cycle from Sep’24, it may be by -25 bps each in every QTR end for the next eleven QTRs rather than a big -50 bps at a time. Fed will gradually remove its restrictive level of rate in an unbalanced way as average core inflation and the unemployment rate still need to go down by around -100 and -50 bps respectively to fulfill the Fed’s dual mandate of maximum employment and price stability.

On Tuesday, the ISM data shows US Manufacturing PMI edged up to 47.2 in August from 46.8 sequentially (lowest since Nov’23), and lower than the market expectations of 47.5. The ISM Manufacturing PMI has remained in the contraction/recession zone for the last 21 months consecutively out of 22 months amid a fresh decline in new order levels. Consequently, production fell at a faster pace despite another period of depletion in the backlog of orders. In the meantime, employment levels fell for the 3rd straight month, albeit at a slower pace. On the price front, costs rose at a faster pace, firmly above market expectations that expected a slowdown against the Fed's hopes of disinflation in the economy.

Although, normally a PMI reading below 50.0 indicates contraction, in the case of ISM MFG PMI, It was revised lower to 45.0 after COVID as there are some structural differences in methodology with S&P Global Manufacturing (MFG) PMI. Thus at even 47.2 ISM MFG PMI, the US private manufacturing/factory activities may be in a slight expansion zone.

The ISM said:

·         The composite index was in contraction for 18 straight months from August 2000-January 2022, and 16 out of 18 months from February 2008-July 2009, which covered much of the Great Recession

·         While the length of time is comparable, the severity is not. The PMI got as low as 40.8 percent in October 2001 in the dot-com bust and plummeted to 34.5 percent in December 2008 amid a global market meltdown. The low point in the current cycle is 46.4 percent in June 2023, which leads to another S-word that Fiore sometimes uses: stable

·         It’s a Slinky cycle’ unfortunately, it’s not the extended Slinky cycle where it’s all stretched out. It’s the compressed cycle, and it’s likely to stay there through the end of the year

·         The story of August centered on output, with the Production Index registering 44.8 percent, the lowest reading of the current contraction cycle. That has had a domino effect on jobs; while the Employment Index increased to 46 percent, survey respondents’ comments regarding head-count reductions were at their highest level since at least the last two year

·         U.S. companies are stepping down their production plans, and that’s why you're seeing the production number come down, which means revenue is coming down. That’s why you see employment (contracting) too because although we’ve been dropping employment for some time, it’s become a lot more urgent. Panelists say their companies can’t afford to hold these workers without additional work coming in during the next three to six months

·         The Inventories Index was the most eye-popping subindex number, with an increase of 5.8 percentage points to 50.3 percent boosting the PMI® and seemingly belying sentiment that companies are hesitant to invest in inventories due to interest-rate uncertainty. But production issues were the most likely reason, Fiore said, as companies adjusted to the lower outputs and diminished backlogs — but not in time-- They couldn’t shut the spigot off fast enough

·         The Prices Index registered 54 percent, up 1.1 percentage points. While volatility with such commodities as metals, plastics, and fuel continues, Fiore said Hurricane Beryl and other storms likely impacted the availability of some chemicals, impacting their prices

·         After none of the six largest manufacturing industries reported growth in the previous month, two — Food, Beverage & Tobacco Products, and Computer & Electronic Products — did so in August. As a result, 65 percent of manufacturing gross domestic product (GDP) contracted in August, down from 86 percent in July

·         The share of manufacturing sector GDP registering a composite PMI calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 33 percent in August, a 20-percentage point improvement compared to the 53 percent reported in July

·         The manufacturing sector’s Slinky is standing upright, stuck in place — but it’s not pulling itself down the stairs, either. Regardless of the election outcome, the elements may be in place for a manufacturing recovery in 2025

·         The closer we get to normal interest rates, the closer we will get to the normal supply-demand environment. The only other issue here is the election. As far as global issues and conflicts happening around the world, that’s a whole different discussion

On Tuesday, the S&P Global final data showed the US Manufacturing PMI was revised slightly down to 47.9 in August from 49.6 sequentially and the flash reading of 48.0, and continued to point to the most marked deterioration in the health of the manufacturing sector so far this year. Production decreased for the first time in seven months as sales continued to fall amid increasing reports of demand weakness. A renewed reduction in employment was also recorded amid spare capacity in the sector. Also, demand for inputs was scaled back in response to lower new orders, leading to a first shortening of supplier lead times for three months. The rate of input cost inflation quickened to a 16-month high in August and was above the average seen before the COVID-19 pandemic amid higher costs for shipping labor, and raw materials. In turn, output prices also increased at a faster pace, albeit one that was still the second-slowest in 2024 so far.

Meanwhile, firms remained confident that output will increase over the coming year, although sentiment eased slightly. Sales and marketing efforts were among the factors supporting optimism, while some firms expect demand to return to normal following the presidential election. The US manufacturing sector recorded a decline in production, bringing an end to a six-month sequence of growth. New export orders were down again, falling for the third month running and at a solid pace. Geopolitical issues were partly responsible for the latest reduction in overseas demand.

The S&P Global said:

“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter. Forward-looking indicators suggest this drag could intensify in the coming months. Slower-than-expected sales are causing warehouses to fill with unsold stock, and a dearth of new orders has prompted factories to cut production for the first time since January. Producers are also reducing payroll numbers for the first time this year and buying fewer inputs amid concerns about excess capacity.

The combination of falling orders and rising inventory sends the gloomiest forward indication of production trends seen for one and a half years and is one of the most worrying signals witnessed since the global financial crisis. Although falling demand for raw materials has taken pressure off supply chains, rising wages and high shipping rates continue to be widely reported as factors pushing up input costs, which are now rising at the fastest pace since April of last year.”

Overall, both ISM and S&P Global PMI survey for US private manufacturing surveys indicate falling production due to a decline in demand amid higher borrowing costs, US election uncertainty, and subdued domestic and external (export) demand. Also, US manufacturing jobs might be subdued in August, while there may be higher inflation for goods or stalled disinflation in August due to rising RM costs, higher labor wages and shipping costs.

The US is mainly a service sector economy (almost 80%), while manufacturing contributes only around 10% of real GDP. The US economy has been suffering from a recession-like situation for a long, even before COVID due to various structural factors; US manufacturing PMI averaged between 55-50 most of the time in pre-COVID periods and after COVID, not sustaining over 50.0 redline due to trade war with China. A PMI below 50.0 signifies a shrinking manufacturing sector, with many industries reporting declining new orders and growing inventories, signaling subdued manufacturing activities.

Also, the US abandoned manufacturing activities to a large extent in the mid-1980s in China (after the later included in the WTO) to contain inflation as Chinese imports were much cheaper due to currency leverage, huge infra/transport support, much lower labor cost and China’s massive scale of manufacturing (global factory/powerhouse). If the US stops importing cheaper Chinese or SE/SA goods completely, US inflation/overall cost of living will soar. In short, China is now the king of ‘hardware’, while the US remains the king of ‘software’ and complements each other.

Overall, the S&P Global and ISM survey indicates a lingering US manufacturing recession/slowdown:

The lingering subdued U.S. manufacturing sector can be attributed to several interrelated structural factors (rather than higher borrowing costs at present) that have collectively hindered growth and led to a significant contraction in output. The U.S. manufacturing sector has experienced periods of recession due to various interconnected factors, including:

·         Global Competition and Offshoring: The U.S. companies have outsourced production to countries with lower labor costs, such as China and Mexico. This has led to factory closures and job losses domestically

·         Rapid Automation and AI Technology: Advances in robotics and automation have reduced the need for human labor in manufacturing. While this boosts productivity, it can also shrink the number of jobs available in the sector

·         Strong USD: A strong U.S. dollar makes American-made goods more expensive on the global market, reducing export competitiveness and leading to reduced demand for U.S. manufacturing

·         Trade Policies: Trade disputes, such as the U.S.-China trade war, have resulted in tariffs and disrupted supply chains. This uncertainty can cause manufacturers to reduce production or delay investments

·         Weak Domestic Demand: Periods of economic downturn/recession and also higher borrowing costs intermittently cause stagnation in consumer demand and lead to reduced demand for manufactured goods, which affects production levels

·         Supply Chain Disruptions: Events like the COVID-19 pandemic and subsequent geopolitics with China  caused global supply chain issues, making it difficult for U.S. manufacturers to get raw materials and components, slowing down production; the same is partially true after the Russia-Ukraine war and subsequent sanction on Russia

·         Volatile Energy Prices: Volatile energy prices can increase manufacturing costs, especially for energy-intensive industries, leading to cutbacks in production when prices rise

·         Shift to Service Economy: The U.S. economy has been transitioning towards a service-oriented structure, which often de-emphasizes traditional manufacturing in favor of hi-tech and finance

·         Weak Consumer Demand: Since early 2022, U.S. manufacturing output has stagnated, driven by a shift in consumer spending patterns. As the economy reopened post-pandemic, consumers redirected their expenditures from physical goods to services, such as travel and leisure activities. This shift has resulted in a notable decrease in demand for manufactured goods, contributing to a contraction in the sector

·         High Interest Rates/borrowing costs/tighter credit: The Fed’s aggressive monetary policy, characterized by rapid interest rate hikes to combat inflation, has significantly increased borrowing costs. This has led to tighter financing conditions for both consumers and businesses, reducing demand for durable goods, which are often financed through loans. Higher interest rates have also depressed housing/mortgage transactions, which directly impacts demand for household goods and appliances and other interest-sensitive sectors including credit cards, auto/personal loans, and business loan

·         Inventory Management Issues: Many manufacturers are facing bloated inventories due to reduced customer orders. This situation has prompted companies to cut back on production, leading to further job losses and a slowdown in manufacturing activity. The need to manage excess inventory effectively has become a pressing concern for many businesses in the sector

·         Sector-Specific Challenges: Certain industries within the manufacturing sector, such as apparel, machinery, and transportation equipment, have been particularly hard hit. The recent United Auto Workers strike and other sector-specific issues have exacerbated the overall decline in manufacturing activity. Recently GM fired almost 1000 tech & service employees as the US automobile/EV sector is not able to compete with China despite almost 100% tariffs; average lower/middle range EV costs around $10K in China against $30K in the US; Tesla starts from around $40K

On Thursday, BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data shows the number of US NFP job vacancies/openings decreased to 7673K in July from 7910K sequentially, below market expectations of 8100K and the lowest since Jan’21.

US NFP Job Openings: July’24

On the last business day of July, the number of job openings was little changed (237K) at 7673K and was down by 1.1 million over the year. The job openings rate, at 4.6%, changed little in July. The number of job openings decreased in health care & social assistance (-187K); state & local government, excluding education (-101K); and transportation, warehousing, and utilities (-88K). Job openings increased in professional and business services (+178K) and Federal government (+28K).

US NFP job Hirelings: July’24

In July, the number and rate of hires changed little at 5521K and 3.5%, respectively. Hires increased in accommodation and food services (+156K) but decreased in Federal government.

US NFP Job Separations: July’24

Total separations include quits, layoffs and discharges, and other separations. Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave their jobs. Layoffs and discharges are involuntary separations initiated by the employer. Other separations include separations due to retirement, death, disability, and transfers to other locations of the same firm.

The number of total separations in July increased to 5420K from 5084K sequentially (+336K). The total separations rate was little changed at 3.4%. Total separations increased in health care and social assistance (+108K). In July, the number of quits was essentially unchanged at 3277K from 3214K but was down by 338K over the year. Over the month, the quits rate changed little at 2.1%. Quits increased in information (+16K). In July, the number and rate of layoffs and discharges changed little at 1762K and 1.1% respectively. Layoffs and discharges increased in accommodation and food services (+75K) and in finance and insurance (+21K).

After the latest revisions in July, the YTM rolling average of NFP job openings to all unemployed persons (H/H survey) ratio is now around 1.07 against the 2023 average of 1.54, the 2022 average of 1.87, and the pre-COVID level of 1.25; The June’24 ratio was around 1.16.

In 2022, the U.S. economy was suffering from an acute shortage of labor force due to various structural as well as cyclical issues including unfavorable demography, shrinkage of the workforce after COVID, early retirements, legal immigration issues, and lack of properly skilled workers, outsourcing, and an increasing number of multiple job holders/gig workers/freelancers. In 2023, the US labor market was rebalanced to some extent as immigration increased/normalized after the lifting of all COVID-related restrictions. Overall, in 2024, one open job is available for around 20 workers (laborers), 18 workers in 2023, and 15 in 2022.

Conclusions:

Overall, the US labor market has gradually cooled in 2023-24 from the very hot situation in 2022 but may be still running at a goldilocks pace, while average core inflation may have to fall more for the Fed’s full confidence about launching the cycle of 11 QTR rate cuts. Thus Fed may like to maintain the wait & watch stance till Dec’24 as it has to evaluate actual data for Q3CY24, which would be fully available by Oct’24. But if the Aug’24 unemployment rate indeed surges further above 4.3-4.5%, then the Fed may have to launch the rate cut cycle from Sep’24 by -25 bps for the next ten QTRs end (total 11 rate cuts -25 bps cumulating -2.75% rate cuts).

Market wrap:

On Tuesday, Wall Street Futures tumbled on lingering suspense about the Fed’s rate cut probability in September after July core PCE inflation stalled and August PMI Manufacturing PMI data by both ISM and S&P indicates rising input cost inflation, and also subdued manufacturing employment. It’s a known fact that the US is suffering long from subdued manufacturing recession-like conditions for various structural issues and thus subdued employment in this sector is not unexpected. However, rising input cost inflation of goods was not expected as it may stall the overall disinflation pace. The market was expecting a -50 bps cut in September followed by another -50 in December for a cumulative -100 bps rate cut in 2024. But overall core inflation data and unemployment numbers may be showing that Fed may continue patience till at least Dec’24 if Aug’24 unemployment figure does not surge above 4.3-4.5% or even fall towards 4.0%.

On Tuesday, techs tumbled led by Nvidia after the US DOJ sent subpoenas to the company (antitrust issues). In regular trading the DJ-30 slid 1.51%, the S&P 500 tumbled -2.12% and the NQ-100 plunged -3.26%, their worst drop since the 5th August plunge. Semiconductor/AI chip stocks plunged led by Nvidia, AMD, Broadcom, Micron Technology and Intel.

On Tuesday, Wall Street Futures were also undercut by a CNBC report that Democrat Presidential Candidate and current US VP Harris may have a plan to impose capital gain tax even on unrealized stock gains (MTM) on super riches (net worth over $100M). Also, subdued US constriction spending and ISM Manufacturing PMI data in August again raised the concerns of a hard landing even as the US continues to be in a state of manufacturing recession for a long due to various structural issues; the US is mainly a service-oriented economy.

On Wednesday, Wall Street Futures recovered to some extent mainly for some short covering after a plunge Tuesday as Nvidia denied that to date, the company has not received any DOJ subpoena notice. Also, than expected JOLTS job opening number in July boosted the hope for a September rate cut. But Wall Street Futures also stumbled in late day trading Wednesday to edge lower in red as the fine print of the JOLTS job opening report indicates Goldilocks US labor market, not a recession-like situation as the layoff ratio was almost stable. Fed may not cut in Sep’24 or cut -25 bps if the August unemployment rate indeed further surges above 4.3-4.5%.

On Wednesday, Wall Street was dragged by energy (lower oil due to OPEC uncertainty about production cut extension), materials, techs, communication services, healthcare, and consumer discretionary, while helped by utilities, consumer staples, and banks & financials.  Scrip-wise, Wall Street was boosted by Travelers, YBM, Boeing, 3M, United Health, McDonald’s, P&G and Goldman Sachs, while dragged by Verizon, Intel, Chevron, Amazon, Caterpillar, American Express and Apple.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (41260) has to sustain over 41500 for any further rally to 41650/41750*-41950/42100* and 42700/41900-43050/44250-44500/44800 in the coming days; otherwise sustaining below 41450, DJ-30 may again fall to 41000/40700-40500*/40300 and 40150/40000*-39700/39450 and further 39350/39200-39100/38900 and 38500*/38300-38000/37600 in the coming days.

Similarly, NQ-100 Future (19790) has to sustain over 20100-20200 for any further rally to 20300*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20050. NQ-100 may again fall to 19750/19650*-19550/19400 and 19300/19100-18800/18700* and further 18550/18450-18200/17950 and may further fall to 17650/17450-17300/17000 in the coming days.

Technically, SPX-500 (5650), now has to sustain over 5700 for any further rally to 5725/5750*-5850*/5900 and 6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5650 may again fall to 5575/5550-5450/5400* and 5440/5300-5250/5100* and further 5050/4950*-4850/4750 and 4550/4450-4350*/3850 in the coming days.

Also, technically Gold (XAU/USD: 2510) has to sustain over 2540 for a further rally to 2560*/2575-2600/2650 in the coming days; otherwise sustaining below 2535-2520, may fall to 2490/2480-2460/2445* and 2435/2420-2410/2400 and further to 2375/2350*-2325/2300 in the coming days.