Market Update – September 8th, 2023
Author: Joe Maas, CIO, SPG Advisors, LLC
Published September 8th, 2023
This week came at a bit slower pace of economic data, as the bears outweighed the bulls across equity markets. As of Thursday, September 7th, the Nasdaq Composite ended down -2.02%, the S&P 500 ended down -1.43%, and the Dow Jones Industrial Average ended down -0.97% for the week.
ISM Services & Manufacturing Indexes: ISM indexes, in both the services and manufacturing industries ticked up in August, breaking the trends of the last few months. August’s Services PMI rose to 54.5%, with new orders and business activity leading the strong data. According to the ISM Services PMI, the services industry has grown 38 out of the last 39 months, with the only outlier month being December of 2022.
In August, the ISM Manufacturing PMI also ticked up, however was still contractionary at 47.6%. This month’s reading counts as the 10th consecutive month of contraction in the manufacturing industry, a very different story than the services side of the economy. Both the Services and Manufacturing PMIs shed light on inflationary pressures as well, with a still hot service sector driving inflation higher, while a cooling manufacturing sector drives disinflation, and deflation in some cases, in the price of goods.
Initial Claims Move Lower: Just as the August unemployment rate increased to 3.8% and economists were feeling hopeful for a soft-landing scenario in the data, initial claims this week came in lower than expected at 216,000 for the week ending September 2nd. Labor markets continue to stay strong amidst a Fed Fund’s rate more than twice as high as it was a year ago. One observation from this unique macroeconomic environment we can say for sure is that it is dynamic and constantly shifting. Right now, labor markets look fairly robust still with an unemployment rate below 4%, but that is subject to change at any point, just like this week of lower claims surprised investors.
Apple Suffers this Week: Part of the market’s slump this week was due to Apple stock’s decline, down over -6% from open on Tuesday through close on Thursday, amidst headlines of Chinese restrictions on the iPhone. Currently, the ban relates solely to government workers, which amounts to approximately 500,000 iPhones, however the concerns for Apple go farther than simply losing 500,000 users. More sanctions from China, could more significantly cut into Apple’s nearly 20% of revenue that stems from the country, and could also disrupt Apple’s supply chain operations. Moreover, China has been a source of growth for Apple, with sales in the region tripling over the last decade, as shown in the chart below. At this time, the only certainty seems to be the government ban on iPhones, however we will continue to keep this geopolitical threat on our horizon.
September FOMC Meeting: With less than two weeks left until the Fed’s September FOMC meeting, markets are pricing in a 95% chance of no rate hike. Given August’s heightened 3.8% unemployment rate and a slew of other economic data, investors are not expecting a rate hike, however this could change quickly with key CPI prints coming in on September 13th.
Looking ahead to the end of the year, as of September 9th, markets are pricing in a 57% chance of no further rate hikes in 2023, which is quite interesting given that inflation remains well above 3% in most measures. Next year, markets are pricing in less than a 1% chance that the Fed holds rates where they are through the end of the 2024. Rate cuts next year will likely be a result of a difficult economy or a cool, soft landing. In either case, we will continue to monitor economic data diligently.
Source: CME Group
Equity markets declined this week, with August’s ISM Services and Manufacturing Indexes coming in higher than a month ago. Initial jobless claims came in much lower than expected, and Apple faced challenges from Chinese iPhone restrictions on government workers. The upcoming September FOMC meeting is expected to maintain rates, but market sentiment could quickly shift with a surprise in August CPI data.
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