Markets bid farewell to August and hello to September last week with most of the attention focused on Friday’s release of the August payroll report and what, if any, Fed policy implications it may bring. Overall on the week, global equity markets finished slightly in the black while U.S. Treasury yields declined slightly across the curve. U.S. markets finished just slightly below their record highs during a vacation oriented week with very light trading volume.
Friday’s jobs report dominated the economic calendar last week. After all was said and done, 151,000 jobs were created, missing consensus expectations of 180,000 but not so much as to spark concern of imminent rate hikes or a drastically slowing economy one way or the other. Fed funds futures pricing for a September rate hike (21%) did not move materially and December remains a coin toss (51%). Of note is that August is historically a seasonally weak and volatile month for the jobs report statistic and is often revised materially in the ensuing weeks.
Two other closely watched economic releases last week were the ISM manufacturing survey and the personal consumption expenditures report. Both reports came in soft, supporting a wait and see approach from the Fed. The manufacturing index fell to 49.4, which is below the 50 threshold, indicating a declining manufacturing sector. Core PCE, the Fed’s preferred inflation gauge, remained steady at 1.6%, well below the 2% target rate. The U.S. dollar strengthened against most commodity currencies (CAD, Real, Aussie) but weakened against the Yen and Euro.
The U.S. dollar had been strengthening over the past couple of weeks largely on Fed narratives of imminent interest rate hikes before the end of the year. Commodity markets softened again last week as the energy complex continued to weaken with crude oil falling 6.8%. Crude oil inventories have increased five of the past six weeks just as gasoline demand is beginning its normal seasonal pattern of demand decline. Contributing to the decline in oil prices is the belief that U.S. oil production is about to scale back up as evidenced by unemployment in the energy and mining sector falling to 5.4% in August from 9.3% in July. Also impacting oil markets last week were indications from Russia supporting potential output controls to maintain upside pricing pressure.
