Daily Global Perspectives

After briefly entering correction territory at the beginning of September, the NASDAQ Composite steadied and resumed its ascent toward all-time highs. The sell-off appears to have been more technical in nature rather than a fundamentally driven decline, which would be more likely to persist. This view seems to be corroborated by the lack of follow-through across asset classes. In foreign exchange (FX), so-called “safe-haven” currencies saw limited buying pressure. In credit, high-yield spreads moved less than expected.

Weekly initial jobless claims remained steady last week, matching the previous week’s total of 884,000, which was above the consensus forecasts of 850,000. Continuing claims under the Pandemic Unemployment Assistance (PUA) program, which allows independent contractors, self-employed individuals, or those who otherwise would not qualify for benefits in regular state programs to file for unemployment, rose by 1,021,294 to 14,591,621. Although the latest reading of the unemployment rate - which is a lagging indicator - showed a decline to 8.4%, these recent numbers, which are more of a leading indicator suggest that labor market improvements are beginning to sputter and may have stalled. After several months of persistent gains, stock and energy markets have stumbled since the start of September. This could be a reflection of investors recalibrating expectations for the speed of the economic recovery.

Friday’s jobs report showed August non-farm payrolls increased by about 1.35 million, bringing the unemployment rate down to 8.4% from 10.2% in July. Average hourly earnings, workweek hours and labor force participation rate all improved, resulting in overall numbers that were better than expected.

U.S. labor productivity — a measure of economic performance that compares the amount of goods and services produced (output) with the number of hours worked to produce them — increased 10.1% in 2Q20, the fastest rate of productivity growth in almost 50 years. This is not necessarily as good as it sounds: the increase was driven by a 42.9% fall in hours worked, which obviously is nothing to celebrate. Output also declined by a staggering 37.1% during the quarter, but this was a relatively good result given the incredible labor market shock.

At this point, 491 of the 500 S&P 500 companies have reported 2Q20 earnings growth, and as expected, it was a dismal quarter. At -30.8%, it was the worst quarterly growth rate of corporate earnings since 4Q08, during the Great Recession. The energy, industrials, consumer discretionary and financial sectors were absolutely pummeled while the celebrated information technology sector eked out a respectable but meager 3.7% earnings growth rate. But then we have a tale of two markets as of the close on Monday: boring, S&P 500 “value” stocks have lost 11% YTD; by contrast, their S&P 500 “growth” counterparts have surged 25.5%, and superstar Tesla, Inc. has rocketed ahead like it’s 1999, with a YTD return of 495%. The euphoria is here and will continue to seep into the market, benefiting a few godlike stocks; but I have seen this before, and it generally doesn’t end well. In the meantime, I am trying to get the jump on coining a neat and cool phrase for when it ends badly, something like, “tulip-mania,” “tech wreck” or “bit-coin bubble.” Please write in with your favorites.

On Thursday, U.S. Federal Reserve Chairman Jerome Powell announced a new policy approach that seeks to achieve an average 2% inflation and evaluates labor markets by looking at shortfalls rather than deviations from full employment. 

U.S. consumer confidence fell to 84.8 in August, missing expectations, down for the second straight month and below its previous six-year low of 85.7 set in April. The Conference Board's Consumer Confidence index is a survey-based indicator of future developments of households’ consumption. The index is comprised of two components: the Present Situation index and the Expectations index. Both declined in August, with consumers’ assessment of current business and labor market conditions contributing most to the drop. The speed and scale of the initial federal fiscal response to the pandemic actually caused personal income for the last three months to rise above pre-recession levels, providing consumers with some sense of assurance during an otherwise frightening period.

Amid mostly negative news and lackluster, albeit largely improving economic data, the U.S. housing market is a rare bright spot that is unequivocally doing well. Home values have been supported by record low interest rates and government stimulus programs that have helped consumer incomes rise throughout the pandemic. One might think the economy was operating at full employment output by only looking at the most recent housing numbers:

• U.S. housing starts in July rose to an annualized 1.496 million, up 22.6% in July after rising 17.5% the prior month and beating consensus estimates of 1.245 million
• Building permits – an historically strong leading economic indicator of the group – increased to an annualized 1.495 million in July, which was better than June’s 1.258 million and consensus expectations for 1.326 million
• The NAHB homebuilder optimism index increased to 78 in August, beating the consensus estimate of 74 and matching its record high set in 1998. All three components of the index – assessments of current sales, expected sales and foot traffic – increased

Reflation is the good kind of inflation, and its presence means the economy is getting back to normal. The biggest worry during this severe recession is that prices could continue to drop, creating deflation, which is another word for “depression.” Fortunately, the Consumer Price Index inflation number surged 0.6% in July for both headline CPI and its more important cousin, “core” CPI, which excludes the volatile categories of energy and food prices. This marks the biggest rebound since August 2012; it puts year-over-year CPI at a reasonably healthy 1.6% and core CPI at 1.0%. This is good news indeed, and is likely responsible for U.S. Treasury ten-year yields popping up to nearly 0.70%. Meanwhile, in another good sign for the U.S. economy, weekly initial unemployment claims continue to plummet — 228,000 fewer unemployed — for the week ended August 8.

The July ISM Non-Manufacturing PMI increased to 58.1, up from 57.1 in its second straight month of services sector growth after declining in April and May. Meanwhile, the ADP Employment Report show private payrolls increased by 167,000, dramatically below expectations of 1 million. Although the ADP report is far from a perfect predictor of the official payroll figures, it may be a harbinger of a weaker than expected employment report on Friday, for which consensus estimates are that the unemployment rate will fall to 10.2% from the current 11.1%.