The Fed meeting and subsequent announcement this past Wednesday seemed rather uneventful. Jerome Powell shared that they had decided to leave rates unchanged while strongly suggesting a cut might come at their next meeting in September. Everything is good, right? Well, two days and a handful of weak economic reports later, the consensus is that the Fed may have held on for too long.
The economic news this week was interesting for two reasons:
- All significant data releases came after the Fed meeting on Tuesday and Wednesday.
- It was universally weak compared to prior months and consensus estimates (see below).
In turn, this made for a very dynamic and volatile week in the markets. Equities were off to another solid start, with markets up nicely through Wednesday’s close. However, come Thursday morning, it was a completely different story. Equities quickly turned negative after the weak initial jobless claims and manufacturing numbers. Follow that up on Friday with payrolls and unemployment, both considerably worse than expected, causing equities to end the week on a downbeat.
If there is a silver lining, it’s that bonds moved higher throughout the week. This is notable as interest rate expectations are moving considerably lower, with two-year treasuries below 4% for the first time in over a year. It’s also crucial as bonds are beginning to provide the protection investors are accustomed to, moving inversely to equities for the first time in many years.
The week’s kicker, though, has to be the unemployment rate moving to 4.3%. While 0.2% may not seem like a lot, this was a significant miss from expectations, and honestly, one that likely would have impacted the Fed’s decision had their meeting taken place next week. This is the highest reading (excluding COVID) since September 2017, almost seven years ago. However, this is not even the most unsettling part of the data release.
With the move to 4.3% unemployment, the data has tripped a historically reliable recession indicator called the Sahm Indicator. This indicator, named after Claudia Sahm, the economist who developed it, has been remarkably accurate in determining if the economy is currently in a recession. Of the 13 times it has been triggered since 1949, only once has it given a “false” signal. And even in that case, the signal was just early, as a recession started five months later. Given this, many economists believe the recession is either underway or imminent.
Notably, though, Ms. Sahm is of the mindset that there may be some issues with how her signal is measuring this unique post-pandemic period. Specifically, she states, “The Sahm rule is likely overstating the labor market’s weakening due to unusual shifts in labor supply caused by the pandemic and immigration.” So, while she’s not ready to call a recession based on her indicator, that’s not to say she thinks it should be disregarded. In fact, she believes her indicator is sending the correct cautionary message and that the Fed should already have cut rates.
Ultimately, we won’t know if we’re technically in a recession until the National Bureau of Economic Research (NBER) analyzes the data and tells us. However, that could be six months from now, and it won’t do anyone much good. Therefore, the hope is that the Fed has absorbed this latest data, and the message is unmistakable. It is time to take action in September before the soft landing escapes them.
Economy
- Market fortunes flipped quickly on Thursday as the bulk of the economic news was weak. The S&P 500 was down -2.1%, the Nasdaq was down -3.4%, and the small-cap Russell 2000 was down -6.7%.
- The S&P 500 is now down -5.7% from its July 16, 2024 high, and the Nasdaq is down -10.0% from its July 10, 2024 high.
Stocks
- U.S. equities were in negative territory. Technology and Energy led the decline, while Utilities and Real Estate outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 41 basis points to 3.79% during the week.
- Global bond markets were in positive territory this week.
- Government bonds led for the week, followed by corporate bonds and high-yield bonds.
