Rates Dive Amid US Slowdown Risks

For the week ending 2 August 2024

As of midday Friday, global equities were lower on the week amid growing indications that the US economy is slowing more quickly than expected. Earnings surprises, especially for megacap tech stocks, weren’t surprising enough, and misses were heavily punished this week. The Nasdaq 100 Index slipped into correction territory in early Friday morning trading after declining 10% from its July high. The yield on the US 10-year Treasury note slumped from 4.20% last Friday to 3.82%, having earlier slipped as low as 3.78% after poor US employment data. The price of a barrel of West Texas Intermediate crude oil fell $3 to $74.35 despite turmoil in the Middle East as growth fears took precedence. Volatility, as measured by the Cboe Volatility Index (VIX), jumped to 21 from 16.5 a week ago.

MACRO NEWS

Growing signs of US slowdown

A slump in the Institute for Supply Management’s manufacturing index, a rise in weekly jobless claims to the highest in a year and Friday’s disappointing US employment report all have investors concerned that the US economy may be headed for a harder-than-expected landing. Rising geopolitical risks have added to market uncertainty as Israel prepares for potential reprisals from Iran and its proxies after the assassinations of high-ranking Hamas and Hezbollah officials.

On Friday morning, the United States reported the weakest growth in nonfarm payrolls since April, a gain of 114,000, while the prior two-months’ figures were revised lower by 29,000. The unemployment rate rose to 4.3%, the highest level since October 2021. Stocks and bond yields extended their dives after the data. Having fully priced in a 0.25% cut from the US Federal Reserve in September, markets have also priced in about 90% chance of a 50-basis-point cut and 100 bps of cuts before the end of the year. Though the US Bureau of Labor Statistics contend that the data weren’t impacted by Hurricane Beryl, which recently hit Texas, investors are on the lookout for potential revisions next month.

Powell sets stage for September rate cut

After holding rates steady on Wednesday, US Federal Reserve Chair Jerome Powell told a press conference that “the second-quarter’s inflation readings have added to our confidence [that inflation is trending toward target], and more good data would further strengthen that confidence.” Powell acknowledged that cutting rates was discussed at Wednesday’s meeting and that a move to lower rates could come as soon as September. These and other dovish remarks fueled expectations that the FOMC will lower rates at its next meeting, though a half-point cut is not something the Fed is considering now, Powell said.

China increases focus on consumption

Until this week, efforts to stimulate China’s economy, had been focused on increasing investment. However, on Tuesday, a meeting of the Communist Party’s politburo turned its attention to increasing what it called “insufficient domestic demand.” A statement following the meeting gave no hint of new measures to boost consumption but emphasized the need to accelerate fiscal and monetary accommodation. Analysts remain concerned that China’s policymakers will continue a piecemeal approach to economic stimulus that has been criticized as too little too late.

BOE hikes, BOJ cuts

The Bank of England cut its policy rate 0.25% to 5% on Thursday, though it was a close call in the Monetary Policy Committee, with those voting to cut prevailing five to four. Governor Andrew Bailey said that the Bank needs to “be careful not to cut rates too much or too quickly.” On Wednesday, the Bank of Japan’s rate-setting committee voted seven to two to raise its policy rate by 0.15% to 0.25%. The rate is now at its highest level since 2008.

QUICK HITS

On Monday, the US national debt surpassed $35 trillion.

Despite a contraction in Germany, eurozone Q2 GDP grew 0.6% year over year, up from an upwardly revised 0.5% in Q1.

Japan’s jobless rate fell to 2.5% in June from 2.6% in May. The jobs-to-applicants ratio fell to 1.23, its lowest level since March 2022. Tight labor markets continue to support rising wages.

The new Labour government in the United Kingdom will deliver its first budget on 30 October.

The Case-Shiller US national home price index rose 5.9% year over year in May. In June, pending home sales fell 7.8% year over year but rose 4.8% from the month before.

Japan’s new vice minister for international affairs, Atsushi Mimura, said that the recent weakness of the yen has done more harm than good to the Japanese economy and that intervention is among the countermeasures available to offset the weakness.

Concerns that the conflict in the Middle East could widen into a regional war grew this week after Israel killed Hamas political leader Ismail Haniyeh in a bomb attack in Tehran. Israel also slew Fuad Shukr, Hezbollah’s top military commander, in Beirut. Israel says Shukr was responsible for ordering an attack that killed 12 Israeli children last weekend. Iran and Hezbollah have vowed to seek revenge against Israel.

Q2 US unit labor costs rose only 0.9% at an annualized rate, down from 3.8% in Q1. Nonfarm productivity rose 2.3%, up from 0.4% in Q1.

According to the Wall Street Journal, transactions at China’s top 100 real-estate developers fell 20% to 279.1 billion yuan (about $38.7 billion) last month from a year ago, widening from the 17% drop seen in June. On a monthly basis, sales slid 36%.

According to MSCI, portfolios of foreclosed and seized office buildings, apartments and other commercial property reached $20.5 billion in the second quarter. That is a 13% increase from the first quarter and the highest quarterly figure since 2015.

Bloomberg reports that the US is weighing restrictions on China’s access to high-bandwidth memory chips used in AI.

Four US residents, including a reporter for the Wall Street Journal, were released from prison in Russia Thursday as part of a massive prisoner exchange involving seven nations and 24 people.

THE WEEK AHEAD

Services sector and composite PMIs will be reported globally Monday, along with the Fed’s Senior Loan Officers’ Opinion Survey. The Reserve Bank of Australia will meet Tuesday. Eurozone retail sales are set for release the same day. Canadian employment data will be reported Friday.

EARNINGS NEWS

With about 75% of the constituents of the S&P 500 Index having reported for Q2 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings rose around 11.5% compared with the same quarter a year ago, according to data from FactSet. This was faster than the 6% pace set in Q1. Sales growth is up 5.5% year over year.

Stay focused and diversified

In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your investment professional, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.

The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.

Past performance is no guarantee of future results.

Sources:?MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.

This content is directed at investment professionals only.??