Good Or Bad News? | September 3, 2021 - Financial Future Services

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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A bad jobs report was delivered on Friday. Is it good news or bad news for the Market?

Monday

Markets opened the week on a strong note. The S&P 500 rose 0.5%. Rotation towards growth stocks continue. Optimism seemed to be brewing regarding the August jobs report due out at the end of the week.

Tuesday

Reversing trend from Monday, markets softened on Tuesday as the S&P 500 lost 0.1%. Home prices rose substantially year over year, however consumer confidence fell sharply last month. A weak consumer leads to weak earnings.

Wednesday

Markets were little changed on Wednesday as the focus continues to shift to jobs data due out on Friday. Investors are hoping that sustained growth in jobs could signal a strong 3^rd quarter GDP reading.

Thursday

The S&P 500 gained 0.25% on Thursday. Factory orders rose 0.4% in July showing the economy is continuing to expand. Additionally, initial jobless claims fell to their lowest level since the start of the pandemic.

Friday

Markets were little changed on Friday as jobs data disappointed. The unemployment rate fell to 5.2% from 5.4%, however, non-farm payrolls missed the mark substantially.

Conclusion

Every month for one week the markets seem to focus on the Friday. The first Friday of every month is the all important jobs report. The health of the job market tells us about consumer spending in the future. It also informs us on how the Federal Reserve Board (FRB) may behave next. Full employment is 50% of the objective for the FRB. A strong jobs report means the FRB may tighten monetary policy. While a weak one actually signals that looser monetary policy may be around for a while. So, yes, the poor jobs report is not good for our economy. It was, however, a good indication that the FRB may continue bond purchases a little longer than originally thought.