This morning, we received a few important reports on the economy, as they provided some more clues about the U.S. inflation situation and the state of the U.S. labor market. The developments on both fronts will likely determine how aggressive the Federal Reserve will be with regard to reducing interest rates before year’s end. The current sentiment is that the Federal Open Market Committee (FOMC) will cut the federal funds rate by a quarter-point at its next two-day monetary policy meeting, which concludes on September 18th.
In the labor sector, initial jobless claims for the week ending August 31st totaled 227, 000, which was down 5,000 from the prior week’s revised tally. We also heard from Automatic Data Processing that private-sector payrolls rose by just 99,000, the smallest monthly increase since 2021. The forecast called for a gain of 140,000 jobs. These reports come on the heels of yesterday’s Job Openings and Labor Turnover Survey (JOLTS) showing a decline in the amount of job openings last month. In all, the data suggest that the labor market is weakening, which is not a great backdrop for the health of the overall economy. This has led to some recent anxiety among investors and the selling in the U.S. equity market this week.
On the inflation front, the Labor Department reported revised second-quarter productivity figures. Specifically, productivity was revised higher (from 2.3% to 2.5%), along with a deceleration in unit labor costs from 0.9% to 0.4%. This should put downward pressure on inflation in the coming months, as a more productive labor market can lead to a decline in the costs of producing goods and services and ultimately a continued easing in prices. Later this morning, we will receive the August reading on nonmanufacturing (services) activity from the Institute for Supply Management. The companion report on manufacturing activity (released on Tuesday) painted a dourer outlook about the manufacturing sector and unnerved investors a bit. The equity futures, which were lower heading into the releases from the Labor Department, turned a bit more favorable, but are still indicating a slightly lower opening when trading kicks off stateside. It is possible we may not see a major move for stocks in either direction today ahead of the much-anticipated August employment report, which is scheduled to be released at 8:30 A.M. (EDT) tomorrow.
September, which historically has been the worst month of the year for stocks, got off to a very volatile start during this abbreviated trading week. The selling, which included outsized losses for the major indexes, particularly the NASDAQ Composite, on Tuesday, has been driven by the aforementioned concerns about the economy, along with worries about the health of spending in the semiconductor industry. The latter worries emerged after industry giant NVIDIA (NVDA) reported strong quarterly results last week, but left investors wanting more in terms of the company’s near-term outlook. The report raised concerns about the health of semiconductor and semiconductor equipment companies and the whole technology industry, prompting some notable selling in the sector the last two days.
Turning back to the economy, the Federal Reserve’s Beige Book summation of economic conditions, which was released at 2:00 P.M. (EDT) yesterday, showed some slowing in the United States. This added to the growing worries about whether the Fed will be able to orchestrate a “soft landing” for the economy, as it concludes the most restrictive monetary policy stretch in four decades. In particular, the report showed that consumer spending ticked down in most districts in the latest period. This is concerning, as the U.S. consumer sector has been the linchpin in the economy’s recovery from the COVID-19 pandemic and continued expansion the last few years. From an equity market standpoint, the recent worries about the economy and the state of the labor market have led to some rotation out of the higher-growth sectors and into the more defensive-oriented groups.
On the corporate front, telecommunications giant Verizon (VZ) has agreed to acquire industry peer Frontier Communications (FYBR) in an all-cash deal ($38.50 a share) valued at $20 billion. The purchase will strengthen the company’s fiber optics network and also will help in the areas of artificial intelligence (AI) and the Internet of Things. Frontier has spent heavily (over $4 billion) since the pandemic on building its fiber network capabilities and will bring 2.2 million fiber subscribers across 25 states to Verizon’s customer base. Shares of Verizon, which are up more than 15% year to date, are looking at a modestly higher opening on the M&A news.
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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