US Market Cont’d To Fall Post FOMC & NFP ?
What Just Happened ?
In just one week (29 Jul 2024 to 02 Aug 2024), all the gains chalked up by S&P 500 index, over June & July, just evaporated into thin air. (see below)
On Fri, 02 Aug 2024 - the S&P 500 index ended the week at 5,346.56.
The last time it was at this level was back in Fri, 7 Jun 2024.
Guilty Parties.
The way I looked at it, there were 3 guilty parties:
FOMC.
Artificial intelligence.
2 Jobs reports.
Federal Open Mkt Committee.
The FOMC kept interest rate unchanged for the 8th time since the last interest hike on 26 Jul 2023.
A lot of market “experts” felt that the FOMC committee should start cutting interest in July 2024.
During the post meeting conference, Mr Powell has mentioned the followings:
If the labor market were to weaken unexpectedly or inflation were to fall more
quickly than anticipated, we are prepared to respond.
Policy is well positioned to deal with the
risks and uncertainties that we face in pursuing both sides of our dual mandate (maximum employment &
stable prices).
Artificial Intelligence.
As the Magnificent Seven report their quarterly earnings progressively, analysts and investors scrutiny of the reports began to make them feel nervous.
This is because of the massive outlay in their pursue of artificial intelligence (AI) ramp up.
There are no signs of (expenditure) abating as the Magnificent Seven are poised to spend more in the coming 2025. (see below)
What’s the “damage” ?
On 23 Jul 2024, $Alphabet(GOOG)$ reported a +90% surge in capital spending to $25 billion, in just the first two quarters of 2024.
On 30 Jul 2024, $Microsoft(MSFT)$ responded with a +78% increase to $33 billion.
On 31 Jul 2024, $Meta Platforms, Inc.(META)$ CEO believed Meta’s spending could hit $40 billion by end 2024.
On 01 Aug 2024, $Amazon.com(AMZN)$ investments in property and equipment during H1 2024, that included spending for its vast ecommerce and logistics network, jumped +27% to $32.5 billion.
Now, we know why investors and analysts alike are getting nervous and with good reasons.
Two Jobs Reports.
For week ending 03 Aug 2024, there were 2 economic reports released. (see below)
US weekly jobless claims.
US Non-Farm payroll.
(1) US Weekly Jobless claims.
On Thu, 01 Aug 2024 - US weekly jobless claims (week ending 27 Jul 2024) sowed the seed of trepidation.
Number of Americans filing new applications for unemployment benefits increased to an 11-month high of 249,000.
It is the highest level since August 2023. (see above)
It was +5.96% higher as compared to last, last weekly claims.
It is also +4.62% higher than the 4-week moving average of 238,000 claims.
Last week’s data suggested softening in US labour market, that is what the Fed has been working towards.
In summary, the unexpected spike :
Ignited fears of a potential economic slowdown.
Investors interpreted this as a sign of weakening labor market conditions (a key indicator of overall US economic health)
Concerns about a potential recession and reduced corporate earnings prospects surfaced.
This prompted the Thursday sell-off, driving the market sharply lower.
(2) US Non Farm Payroll.
The final nail to the coffin came on Fri, 02 Aug 2024 morning when the Bureau of Labour Statistics released the US Jobs report (Non farm payroll) for July 2024. (see below)
(a) Jobs creation.
A net 114,000 new jobs were created in July 2024.
It was well shy of Wall Street's 175,000 forecast by -34.86% and its the second lowest tally of 2024.
(b) Average hourly wage.
Average hourly earnings (a closely watched inflation barometer), meanwhile, were up +3.6%, the smallest gain since May of 2021.
(c) Unemployment rate.
Perhaps, what was more concerning was headline unemployment rate rose to 4.3% from last month 4.1%.
This was the highest since October 2021. (see above)
When trading opened on Friday, US market continue to fall, from where it left off at Thursday 4pm.
Tri-Factor @ Work.
The weaker-than-expected NFP report sent shockwaves through the market, mainly because of the following argument:
Recession Fears Intensified: The sharp decline in job creation and the rising unemployment rate reinforced concerns about a potential economic downturn. Investors fear that a slowing economy will lead to lower corporate profits and decreased consumer spending.
Fed Policy Uncertainty: While the Fed has indicated a potential pause in rate hikes, the weaker-than-expected NFP data could revive discussions about the possibility of further rate cuts. This uncertainty creates volatility in the market.
Market Sentiment Deterioration: The combined impact of the jobless claims and NFP reports has significantly worsened market sentiment. Investors are becoming increasingly cautious and risk-averse, leading to heavy selling pressure.
What’s Next for Aug 05?
It will be a challenge to second-guessed market sentiments and investors’ trading behaviour (institutions and retail) .
However, if assessment is based on the following criteria, it might just provide a guage or framework for us to assess market situation as it unfolds across next week.
(1) US economic reports.
Just as NFP have spooked US market on Friday, hopefully the following reports will be the stablizing factor for coming week.
US Purchasing Manager Index (PMI) data, including (ii) ISM services and (iii) detailed sector PMI data from S&P Global, will be in focus, providing further insights into US economic conditions - this week.
Specifically, further confirmation of easing inflationary pressures, especially in the service sector will be crucial to cement the Fed's intent for lowering interest rates.
Flash PMI so far having indicated a further encouraging moderation of service sector inflation in July.
(2) Corporate earnings.
The Magnificent Seven’s quarterly earnings have been a disservice to US market, causing it to fall drastically.
In the coming week, will the following corporate earnings be able to lift up market sentiments:
$Palantir Technologies Inc.(PLTR)$ - Mon, 05 Aug 2024. PM.
$Caterpillar, Inc(CAT)$ - Tue, 06 Aug 2024. AM.
$Novo Nordisk A/S(NVO)$ - Wed, 07 Aug 2024. AM.
$CVS Health Corporation(CVS)$ - Wed, 07 Aug 2024. AM.
$Eli Lilly and Company(LLY)$ - Thu, 08 Aug 2024. AM
$Gilead Sciences, Inc.(GILD)$ - Fri, 09 Aug 2024. PM.
(3) Fed’s socialization.
On Thu, 08 Aug 2024 - Richmond Fed President, Tom Barkin will be the first Fed member to be speaking after last week’s FOMC meeting.
It is quite likely that he would say something neutral in an attempt to calm the market.
Hopefully market listen to what he has to say and take it positively.
(4) Past years - Month of August.
Fundamentally, the month of August is a non-performing calendar month. (see above)
The above chart shows the S&P 500 Index’s past 5 year performances.
In 2022 and 2023, after July - S&P 500 fell in August before staging a recovery in September.
Will August 2024 be an exception, rather than the norm ?
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Do you think US economic reports to be released this week, be able to turn the US market around?
Do you think US companies’ quarterly earnings be able to lift the market out of its doldrum?
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