Here’s The Asset Guidance Group Outlook for the Week Ahead Starting…

August Summary:

August was a difficult month for U.S. stocks as all the major benchmarks finished the month in the red.  The Dow shed -4.1%, while the NASDAQ fared the worst—down -4.6%.  Large caps and mid caps declined -4.2% and ‑3.3%, respectively.  Small caps did the “least worst” and finished the month down -2.2%.  August was difficult for international markets as well.  Canada’s TSX retreated -1.8%, and the FTSE declined -1.9%.  France and Germany shed -5.0% and -4.8%, respectively.  China gave up -1.6%.  Japan was the only major market to finish the month up, gaining a modest 1.0%.  As grouped by Morgan Stanley Capital International, developed markets ended the month down -6.1%.  Emerging markets ended down -1.3%.  In the commodities markets, Gold gave up -3.1%, while Silver plunged a large ‑11.5%.  Oil finished the month down -9.2%, and copper closed the month of August down -1.6%.

U.S. Economic News:

The number of people who applied for first-time unemployment benefits at the end of August fell to a nine-week low last week, showing no sign that a slowing U.S. economy is triggering widespread layoffs.  The Labor Department reported new jobless claims declined by 5,000 to 232,000 in the seven days ended August 27.  Economists had forecast new claims would total 245,000.  New unemployment filings had fallen to as low as 166,000 in late March, while topping out at 261,000 recently.  By most metrics, the labor market remains extremely tight—too tight in the view of the Federal Reserve.  The central bank wants to see hiring slow and unemployment rise slightly to help ease inflation.  Meanwhile, the number of people already collecting benefits, so-called “continuing claims”, rose by 26,000 to 1.44 million.  That number is reported with a one-week delay.

The U.S. added over 315,000 new jobs in August according to the Labor Department’s monthly jobs report, showing businesses still have a big appetite for hiring even as the economy slows.  The increase in hiring basically matched economists’ estimates.  Economists had forecast 318,000 new jobs would be created.  Meanwhile, the unemployment rate ticked up slightly to 3.7% – mostly because more people entered the workforce in search of jobs.  That number is at its highest level in six months.  In the report, professional businesses led the way with 68,000 new employees added, while employment also rose in health care, hotels and restaurants, retail, manufacturing, and finance.  No major industry reported a decline in employment, a sign of broad strength in the labor market.  Jennifer Lee, senior economist at BMO Capital Markets summed up the report succinctly, “So was this good or bad? Both.  This does not change the view that the labor market is ‘clearly out of balance,’ to quote the Fed chairman, and will keep the central bank tightening into year-end.”

The number of jobs openings in the nation rose to 11.2 million in July, the first increase in four months.  However, companies aren’t as anxious as they were to fill the open spots – the number of jobs being filled slipped for a fourth month.  The so-called “quits rate”, rumored to be the Federal Reserve’s preferred measure of the health of the labor market as it is presumed a worker would only leave a job in favor of a more lucrative one, dipped to 2.7%.  However, despite the decline it remains near the peak of 3% it reached at the end of 2021.  Indeed Hiring Lab senior economist AnnElizabeth Konkel stated, “While there are some signs of cooling, all in all the labor market is still hot.  Layoffs remain low and the elevated quits rate and job opening continue to be signals of strength.”

The rate of home price rises continued to slow sharply, according to the latest report from S&P Case-Shiller.  Case-Shiller’s 20-city home price index slowed to an 18.6% annual increase in June, down almost 2 full percentage points from its previous reading.  The annual rate of home price increases has slowed sharply since reaching its peak of 21.2% in April.  A pair of Florida cities, Tampa and Miami, reported the highest year-over-year gains among the 20 cities in June, along with Dallas, Texas.  Cleveland, Minneapolis, and Washington D.C. reported the lowest year-over-year gains.  A broader measure of home prices, Case-Shiller’s national index, rose just 0.3% from May to June.  That was the lowest monthly increase in two years.  Stephen Stanley, chief economist at Amherst Pierpont, wrote in a note, “The housing sector is weakening sharply.  June is the first month that the official price data began to show the shift to cooler demand for homes.”

Confidence among the nation’s consumers rose for the first time in four months predominantly due to falling prices at the gas pump.  The Conference Board reported its measure of consumer confidence jumped 7.5 points to 103.2.  Economists were expecting a reading of just 97.4.  In the details, the measure of how consumers feel about the economy right now, the ‘present situation index’, rose 5.7 points to 145.4, while a similar gauge that assesses how consumers feel about the next six months jumped to 75.1 from 65.6 – its highest level in four months.  Lynn Franco, senior director of economic indicators at the board stated, “August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term.”

A key measure of manufacturing activity held steady in August, as new orders and employment turned positive, while inflation lessened.  The Institute for Supply Management (ISM) reported its U.S. manufacturing index came in at 52.8.  While the reading matched its worst headline number since early in the pandemic, it was better than expected.  Economists had forecast the index to slip to 51.8.  Readings above 50 signify growth.  One red flag: Numerous executives said inventories are too high.  In the details, the index of new orders rose 3.3 points to 51.3, while the employment gauge turned positive climbing 4.3 points to 54.2.  The prices index, a measure of inflation, sank to 52.5 – its lowest level since June 2020.  That gauge has fallen five months in a row since peaking in March at 87.1.  Oren Klatchkin, lead U.S. economist at Oxford Economics said, “The final months of 2022 will be quite challenging for manufacturers.  Soft domestic demand and recession worries will weigh on growth. [1]

Random Thought/Image of the Week

As bad as inflation seems in the U.S., it is much worse in the Eurozone where inflation jumped 9.1% in August – a new record for Eurozone data that goes back to 1997.  Estonia led the way with a huge 25.2% rise, while Germany hit a record 8.8%.  After years of money printing by the European Central Bank (ECB) that turned into an absolute torrent during the pandemic, inflation “suddenly” spiked in early 2021.  By July 2021, Eurozone inflation had shot past the ECB’s inflation target of 2%, and by August inflation had hit 3% and continued shooting higher.  At the time, the ECB parroted the Federal Reserve’s line that this inflation was “transitory”, and it continued on its course of non-stop money printing.  By January 2022, just before Russia’s invasion of Ukraine, Eurozone inflation had shot to 5.1%, with two Baltic states already in the double-digits.  And since the invasion of Ukraine, the upward trajectory of inflation has continued unabated.  The chart below, from wolfstreet.com, represents every European central banker’s nightmare. 

Structured Note Values

1. XLE/XOP Lowest, XLE Pricing Value 3/25/22: 78.75, Current: 79.96, Delta +1.54%; XOP Pricing Value 3/25/22: 138.60, Current Value: 142.40, Delta +2.74%
2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 23.79 Delta -32.01%; GDXJ Pricing Value 4/29/22: 42.95, Current: 29.29 Delta -31.80%
3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 23.79 Delta -26.55%; GDXJ Pricing Value 5/26/22: 39.67, Current: 29.29, Delta -26.17%
4. ARKK Pricing Value 6/15/22: 39.42, Current: 40.59, Delta +2.97
5. ARKK Pricing Value 7/15/22: 44.11, Current: 40.59, Delta -2.97%
6. SPX Pricing Value 7/18/22: 3863.16, Current 3924.26, Delta +1.58%
7. RTY Pricing Value 7/18/22: 1744.37, Current: 1810.60, Delta +3.80%
8. NDX Pricing Value 7/18/22: 11,452.42, Current: 11,630.86, Delta 1.56% [4]

The Week Ahead

The Atlanta Fed’s GDP model is forecasting 1.6% growth in Q3, while the odds of a
75bps rate hike at the September 21 FOMC are near 60% according to Fed Funds
futures. August’s employment report will be released Friday and could have a big
impact on both projections. The last three NFP reports have exceeded expectations,
so investors will be watching to see how labor markets are holding up. Also, the ADP
jobs report returns after a month’s hiatus with an overhauled methodology that may
provide additional context. Other events of note in the U.S. include consumer
confidence, ISM Manufacturing PMI, Chicago PMI, and factory orders. Overseas,
flash CPI figures for Germany and the EU will be the last inflation updates before the
ECB meets on September 8. The euro has slid below parity with the U.S. dollar for the
first time in 20 years, and policymakers are caught between controlling skyrocketing
prices and raising borrowing costs for highly indebted nations.  [2]

Chart of the Week: Volatility Returns

After two months of steadily declining volatility in both the S&P500 Volatility Index (VIX, red candles) and the Russell 2000 Volatility Index (RVX, purple candles), both have reversed their trends recently, rising over 30%. It began two
weeks ago as concerns of a
hawkish Fed increased. Those
concerns were validated with
Fed Chair Powell’s Jackson
Hole speech, sending markets
tumbling and volatility indexes to new short term highs. Early Friday it appeared as though they may turn down, but instead bounced up from rising technical support, making a second higher low. VIX and RVX are still well below June levels, but if equities keep falling it may not stay that way.

Click on the Chart to Enlarge. [3]

Sources: [1] Asset Guidance Group analysis, www.stockcharts.com; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; [2] Data & chart from thehustle.com; [3] tdainstitutional.com; [4] stockcharts.com. 

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