![]() economy that remains healthy and has some cushion to absorb the ongoing interest rate increases. In our view, the strength of the labor market and the resilience of the ISM manufacturing index point to a U.S. ![]() A reading above 50 indicates economic activity is generally expanding. Finally, the ISM manufacturing index, which tends to be a good proxy of economic activity in the U.S., came in at 52.8 for August, above expectations of 52.0. And wage growth, while it remains elevated at an annual gain of 5.2%, continues to moderate from peak levels set back in March this year. ![]() Notably the labor force participation rate also moved higher to 62.4% from 62.1%, indicating that some labor supply may be returning to the workforce, a welcome sign for many industries facing labor shortages. The unemployment rate did tick higher to 3.7% from 3.5%, but this also remains near record lows. Keep in mind that in the ten years prior to the pandemic, average job gains were closer to 150,000, so labor market activity continues to remain robust. Nonfarm jobs increased by 315,000, above expectations of 300,000. The August jobs report for example, came in inline to slightly better than market expectations. economy remains relatively healthy, as highlighted by the jobs report and ISM manufacturing reading. This past week also underscored that the U.S. Labor market and economy remains resilient – the U.S. This chart shows the recent fall in the ISM prices paid index which is an indication that inflation may have peaked and is rolling over. ISM Manufacturing Prices Paid index moved to the lowest level of the year last month, in-line with pre-pandemic figures Nonetheless, inflation may take months to move decisively lower, as several components may be sticky, including rent, shelter, and broader services inflation.įigure 2. We continue to see softness in oil and commodity markets (although these are volatile series), last week's ISM manufacturing prices paid index fell to the lowest levels of the year, wage gains are steady, and the housing market is starting to cool, as mortgage rates climb higher. Perhaps the good news here is that several signs point to peak inflation still being behind us. Investors will now be squarely focused on incoming inflation readings, which will determine the path of the Fed going forward. In this backdrop, we would expect bond yields to also grind higher, putting downward pressure on equities, particularly higher valuation growth sectors of the market. Markets are now entering the historically volatile months of September and October with a Fed and global central banks poised to move rates higher and implement quantitative tightening balance sheet reduction programs. This chart shows the markets expectations for the Federal Reserve to raise rates to 4% by December 2022 and keep rates at elevated levels at least through 2023. A Fed pause, not pivot: Market expectations now call for the Fed to raise rates through December 2022, before pausing in 2023 Prior to Powell's speech, markets had been pricing-in Fed rate cuts starting in mid-2023 however, expectations now call for a Fed pause, but no pivot in 2023.įigure 1. Not only did this accelerate the sell-off in equity markets and push bond yields higher, but there was also a notable shift in forecasts for the fed funds rate. After last week's Jackson Hole economic symposium, market expectations seemed to reset. Notably, the labor report for August still reflected a relatively resilient labor economy, with the unemployment rate ticking just modestly higher to 3.7% - although this may continue to soften in the months ahead as Fed rate hikes continue. Chair Powell acknowledged that this process could bring some pain to the labor market and broader economy as well. Financial markets prepare for more Fed rate hikes and no pivot in the months aheadĪt last week's Jackson Hole economic symposium, Jerome Powell delivered a concise and pointed message for markets: The Fed is committed to raising rates, and keeping them elevated, until inflation comes down in a meaningful way. While the near-term may be volatile, we see a case for markets to stabilize heading into year-end, driven by two key factors: midterm elections and a potential Fed pause in 2023. Nonetheless, markets are still forecasting a 75 basis-point (0.75%) rate hike at the September FOMC meeting and a terminal fed funds rate of close to 4.0%, with expectations of Fed rate cuts removed from mid-2023 forecasts. We saw equity markets fall and bond yields rise somewhat, even after a resilient jobs report on Friday. Last Friday, Jerome Powell told investors at Jackson Hole that the Fed is committed to raising rates and fighting inflation until it "gets the job done." This past week, financial markets took that message seriously. Roadmap through year-end: Near-term volatility followed by potential recovery
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