Weekly Comment: Weak jobs data raises doubts on US economic strength

6 minute read

Weekly podcast – Market overview

This week's host, Investment Adviser Harriet Meade, is joined by Richard Carter, CFA, Head of Fixed Interest Research, and Matt Dorset, Equity Research Analyst, to discuss the latest developments shaping global markets. Together, they explore why rising bond yields have become one of investors' biggest concerns, and whether the market's muted reaction to the new Prime Minister reflects confidence in the UK's outlook or a more cautious wait-and-see approach. They also examine the growing focus on defence spending, asking whether the sector's prospects are already reflected in valuations and identifying industries that could benefit indirectly from increased military investment.

Important information - This is a marketing communication provided for information purposes only and does not constitute independent investment research, investment advice or a personal recommendation.

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Market overview

The latest US employment figures have bucked expectations, with a slight decline of 23k jobs reported in July, compared to estimates that 80k jobs would be added. Furthermore, revisions mean that over 100k jobs have been removed from the totals from the previous two months too, indicating that all may not be well with the US economy given the slowing of GDP growth we saw in the second quarter.

After a soft period around the turn of the year, monthly non-farm payrolls showed a reassuring pick-up in hiring activity in the second quarter, with three consecutive better-than-expected readings of 100k jobs added. However, this latest print, along with the downward revisions to prior months, has kept any exuberance on hiring trends firmly in check.

Private employees added just 30k jobs last month, although 22k of these were in the construction sector, which could be seen as reflective of the boom in data centre build out. Leisure and hospitality cut 40k workers after cutting even more in June and retailers shed more than 19k employees. Still, a greater number of Americans exiting the workforce meant that the unemployment rate eased to 4.1% from 4.2% in June, despite fewer people working.

Fed hike less likely

Such figures will perhaps temper expectations of a rate hike when the Federal Reserve (Fed) next meets, in September. Expectations had risen into the last meeting that a rate hike was around the corner as inflation became increasingly difficult to get under control but data points released since then would suggest otherwise. Stocks and bonds reacted positively to the jobs release, reflecting this expectation of potentially lower interest rates.

Fed chair Kevin Warsh is adamant that he will not provide the level of forward guidance the market has become accustomed to. Instead, he is allowing data such as this to do a lot of the heavy lifting, with rumour and scuttlebutt filling the rest of the gaps. This jobs report, coupled with stubbornly high and persistent inflation and weakening economy, means the market is struggling to know what the future direction is. As such, it has to plan for a number of scenarios, increasing the nervousness that is already out there from equity valuations and geopolitical risk. Markets hate unknown risk, yet it looks like it will have to deal with it during the tenure of Warsh.

This week’s inflation data from the US will be closely watched by investors, with consumer price and producer price figures scheduled to be released.

New all-time highs

US stocks powered to new highs last week. Sentiment has been boosted in the near term by encouraging noises coming out the Middle East regarding a seemingly higher barrier to potential future escalation while data such as the soft employment figures have also been supportive. Underpinning the current mood music has been a stellar earnings season — 88% of US large caps have now reported Q2 figures, with 86% of those beating analysts’ expectations, according to FactSet. What is more, the size of the beats (29% higher than those estimates) is on course for a record earnings surprise, according to data going back to 2008. Barring a major, last-minute, negative shock this will be a seventh consecutive quarter of double-digit earnings growth from US large caps.

One note of caution is the relatively narrow concentration of the biggest earnings beats, coming in energy and AI stocks, particularly runaway profits at memory companies. For energy firms, there has been a 147% rise in blended earnings growth, 117% increase for communication services companies and 70% lift for the broader tech sector.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week with a 2.9% gain.

United States:

Most of the gains for US stocks occurred early last week, driven by the boost in investor sentiment to optimism around the potential reopening of the Strait of Hormuz. Tech stocks led the way higher, posting their best weekly performance in four months in rising 5.2% (15.2% YTD). Bucking the recent trend, growth stocks outperformed their value counterparts, rising 5.3% (5.7% YTD) vs 2.3% (23.4%).

Declining oil prices and softer jobs figures lifted US bonds on the week, with the 10-year Treasury yield dropping to 4.65% from 4.74%. The yield remains 48 basis points (0.48%) higher YTD. The move was comparable in the two-year Treasury, where the yield also declined nine basis points to end at 4.20%.

United Kingdom:

UK stocks underperformed on the week, rising 0.5% (12.1% YTD). Events overseas were the main drivers, with falling oil prices weighing on energy stocks. Some good news came on the economic data front, with the UK services purchasing managers’ index (PMI) rising to 52.1 from 48.8 in June — a welcome return to expansion after two consecutive months of contraction. Improvement was also seen in the manufacturing PMI which increased to 52.8 from 52.5.

The 10-year gilt yield moved back below the 5.0% handle, ending the week at 4.92% from 5.05%. The yield is up 44 basis points YTD. The pound ended the week flat at US$1.35, around the middle of a relatively narrow range of US$1.30-US$1.38 since early April.

Europe ex UK:

The MSCI Europe ex UK added 2.2% last week (13.6% YTD). German equities rose 2.7% 7.5% YTD), French stocks gained 2.4% (9.7% YTD) and Italian bourses continued to outperform, tacking on 3.0% (23.2% YTD). The single currency rose slightly against the US dollar, ending the week at US$1.16.

Important information

Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.

This material is a marketing communication provided for information purposes only and does not constitute independent investment research. References to financial instruments are for general information purposes and are not subject to requirements applicable to independent investment research.

Any references to securities or financial instruments should not be regarded as a personal recommendation, or as an offer, solicitation or invitation to buy or sell any financial instruments. The views expressed are those of the authors at the time of publication and are subject to change.

This material does not constitute tax, legal or accounting advice. You should seek independent professional advice appropriate to your individual circumstances before making any financial decision or engaging in any transaction.