Weekly Recap:

by Eric Criscuolo & Michael Reinking, CFA

Last week as we continued to march towards the end of summer, US equities spent the first half of it uninspired, quiet and range bound.  The Three Amigos- PCE, Nvidia earnings and Fed Chair Warsh’s Jackson Hole speech- were keep markets in holding pattern. In summary: PCE was inline. Nvidia posted another stellar quarter. Warsh delivered a hawkish speech. Nothing really out of left field. The S&P 500 finished the week up 0.5%. The equal-weight was a mirror image however, falling 0.5% as megacaps held up while breadth deteriorated. Only 3 sectors ended the week meaningfully higher. Tech gained but needed a big week from software to do it. Small caps lagged and were particularly weak on Friday when rates climbed higher.

This week we flipped the calendar to September, the worst month for stocks. It's a market fact that has been regurgitated ad-nauseum. We're among the guilty, and things started according to plan. Over the weekend the US and Iran exchanged fire for the first time since July. President Trump also posted AI-generated videos of Kharg Island being “blown to smithereens”.

On Tuesday the S&P fell 0.7% as hostilities continued after Iran attacked tankers in the Strait, followed by a US response. Oil shot higher. That was a primary factor this week: crude oil continuing to rise. That the pressure on treasuries, helping drive yields higher. It wasn’t just a US thing though as global rates marched higher.  

At mid-week the S&P was down about half a percent. The weakness manifested on Monday and Tuesday, but on Wednesday stocks rallied broadly as my kids went back to school and my son celebrated his first full day as an 8yr old. We tested the low-end of the 7600-7800 range the S&P has been in since the beginning of August, and it held. Comments from NY Fed President Williams that recent inflation data has been encouraging put a modest bid into Treasuries, helping equities. The Energy sector was by far the leader due to oil’s gains. There was a defensive tilt to the rest of the leaderboard as Consumer Staples, Healthcare and Utilities made up the rest of the top performers. The cyclical Consumer Discretionary and Industrials were the primary laggards, along with Real Estate. More dovish comments from Fed Governor Waller on Thursday, along with a soft ADP report, helped rates pull back further and further boost stocks. It was all relatively modest, however.

Last week the market awaited The 3 Amigos data releases. This week, it was just Fletch (the original) on the marquee, as Friday brought the monthly jobs report. As we note below it was a strong print and included upward revisions to prior months. Yields backed up (though only modestly) and the S&P drifted lower, even as oil was unchanged.

For the week the S&P 500 was fractionally higher, firmly within the 7600-7800 range. The equal-weight fell 0.8% however, as mega caps outperformed (NYSE 100 +0.7%). Small caps hugged the unchanged line. Breadth was soft with 6 sectors lower and 2 near unchanged.

After starting the week under pressure mega cap tech saw solid gains in the middle of the week. Tech earnings have continued to be very strong on the surface, though stock reactions have been mixed depending on expectations and guidance. Snowflake became the latest big software stock to rip on its earnings. After Salesforce’s 20% gain last week, the stock rose over 20% at its highs on Thursday, finishing +17%. However overall, there was a return of the hardware over software trade as the ICE Semis index rose 2% and the DRAM ETF 7% while the IGV software ETF fell 5%.  

In the end, Energy was the leader this week with crude gaining ~10%. Tech was next, with divergence noted above. Utilities was the only other sector meaningfully higher, despite the modest backup in rates. The sector also overcame sharp declines in EIX and PCG on California wildfire legislation updates.  The cyclical Industrials, Materials and Consumer Discretionary and Real Estate lagged. Amazon's 3% decline pressured Discretionary, and LULU fell 20% on Friday on disappointing earnings. While note technically Discretionary, there were a few negative updates from food companies that weighed on consumer stocks as a whole. Tyson Foods (TSN) negatively pre-announced, citing one of the worst cattle shortages in US history. Campbells (CPB) cut its dividend, while seeing margin pressure and   a soft guide.

Labor Day weekend started early with the biggest labor market report, monthly employment. The data came in very hot, at 162K jobs added, basically tripling the consensus. Not only that but June payrolls were revised higher, from 20K to 31K, and July from -23K to +44K, underscoring the high volatility of the report and raising questions on potential revisions to this print. Today's report ended, for now, a 4 month streak of declining employment growth. Food Services & Drinking places (+59K) contributed a large part of the gains, and information (including tech) lost 23K. The unemployment rate was unchanged at 4.1% as the participation rate also rose, bucking the long-term trend.

Officials have not expressed much concern over the labor market, however. During his speech this week, Fed governor Waller said his vote would be determined by the upcoming inflation data, saying that with "economic activity and the labor market in good shape, they are not a large factor in my determination of the appropriate setting of monetary policy."    

JOLTS was the other main labor data this week. Job Openings (7.271M) were just below estimates (7.3M), rising modestly from the prior month (7.182M). However that number was revised down by 177K. Manufacturing (+79K) had the largest increase in openings while Professional & Business Services has the biggest decline (-65K). Hirings fell 278K, also led by a decline of 188K in Professional & Business Services. Construction (47K) saw the biggest increase. Layoffs and Discharges fell from last month and remain on-trend. Challenger job cuts rose to 52.9K, from 33.4K previously, though it was the lowest August cut level since 2022. Consumer products led with 10K cuts.

Our favorite market warlock, Treasury Secretary Bessent, had an interview with CNBC at the G20 summit on Monday morning. Among his commentary:

The ISM PMIs were also an important release this week. Manufacturing was 54.6, a little below consensus and lower than last month (55.6). While the index and its major components remained above the expansion level (>50) the growth moderated across the board. New Orders, Employment and Backlog all declined versus last month. Costs continued to rise strongly but the rate was unchanged from last month.

The commentary focused on rising prices and component shortages:

Services PMI was better than expected and improved from last month. New Orders rose and at over 60 are well into expansion territory. Prices rose as well however, reaching their highest since August 2022.

Among the commentary:

The Fed Beige Book didn't elicit too much of a market response. The reported noted "Economic activity increased modestly since early July" and 10/12 Federal Reserve Districts reported slight to moderate growth, while the other 2 reported no change.

The Dallas Fed Manufacturing survey improved from last month. New Orders jumped for both Current and Six-Month out periods. Prices Paid accelerated and remain highly elevated (49% reported an increase, 47% reported no change) while Prices Received moderated slightly. Both measures showed increases for future expectations. 

Construction Spending missed estimates, falling 0.5% in July versus June and 3.8% y.y. Residential led the decline, falling 1.3% / 7.3%, respectively. Office construction rose 2.9% / 16.9%, driven by data centers, which increased 6% / 57%.

The treasury curve steepened as the 10y rose 7bp and the 2y was up 2bp. Comments from Fed members Williams and Waller helped move rates off their highs of the middle of the week. The strong jobs report had erased all of the move lower at one point in the 2y, but yields retreated from their highs throughout the day. The 10y is sitting near its highs of 4.8%. Market pricing for a Fed rate hike was 50/50 heading into the jobs data but moved up to 60% after it- basically where it was a week ago. Yields across the globe moved higher, though Japan's long-end dropped on Friday.

The outlook for Japanese yields grew more hawkish and a rate hike by their central bank at the next meeting is almost fully priced in. The Dollar fell over 2% against the yen this week, but gained against the Swiss franc despite Swiss inflation coming in hotter than expected.

Japan - The Nikkei ended down 2% after a Friday push, finishing right around its 100d ma. A pullback in JGB yields and strengthening of the yen after hawkish central bank + Bessent commentary were the stories of the week.

China/Hong Kong - The Hang Seng was modestly higher while Shanghai fell 0.6%. Over the past month Shanghai is up 1% while the Hang Seng is down 1%. However the Hang Seng Tech index is down 7% as the big consumer tech stocks like Alibaba and Tencent have declined over 10% as AI spending has pressured margins and driven capital raising concerns, which are coinciding with weak Chinese domestic demand. Financials have energy stocks meanwhile have seen solid gains over the past month to mitigate the tech weakness. Official Manufacturing PMI was inline and improved modestly from last month (but <50) and non-manufacturing was better than expected, but also in the <50 contraction area. The private RatingDog PMIs were better than expected however and improved from last month. While yields are rising globally, China continues to be an exception. The 10y fell a few bp this week and is at 1.7%, producing a near-record gap to US yields.

South Korea - It was a relatively uneventful week for the KOSPI as it fell 1.5%. It is settling into a range following a 40% drawdown from mid-June to end of July, and about 10% above its 200d ma.  

Europe - Europe ended lower ahead of the ECB rate decision next week. Energy/oil and financials  led as oil and yields rose. Gas remains a key concern, both the rising price and the storage situation as stocks are well below typical levels. Swiss inflation surprised to the upside. The central bank has pegged rates at 0% and consensus has them on hold through 2027. European PPI was hotter than expected and rise from last month. Germany's DAX lagged, falling 2% but support remains intact at the 50d ma and is 2% from its ATH.

Emerging markets were outliers to the upside this week, benefitting from the weaker dollar and higher oil.

Markets are closed on Monday for Labor Day as summer unofficially comes to an end. We’ll get the latest reads on inflation with CPI and PPI, framing the Fed rate decision the week after. Waller in his speech said the print could determine which way he votes. The ECB will hold its rate decision meeting, where a hike is largely expected. Earnings will include Oracle, Adobe, Macys, Krogers and Jersey Mike’s, among others. The end of summer also brings a burst of broker conferences, so there will be a lot of management commentary to parse. College Football moves from Week Zero to Week One (with Rutgers season over already), and the one we’ve all been waiting for, the NFL regular season kicks off with a Super Bowl rematch as the Seahawks take on the Patriots. On a more somber note, Friday will be the 25th anniversary of September 11, a day we will never forget. Enjoy your long weekend.

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