Treasury yields ease on weak jobs data
Wall Street began September, typically a seasonally weaker month for equities, cautiously as investors digested a ruling from a federal appeals court that most of President Trump’s tariffs were illegal. Stocks picked up through the week on rate cut hopes amid weaker labour market data. US job openings fell to their lowest level in 10 months in July, while the ADP private employment report came in lower-than-expected. The most anticipated data came on Friday with the non-farm payrolls report painting a similar cooling picture, with US employers adding just 22,000 jobs in August. This was much below estimates of 75,000 and cemented expectations that the Federal Reserve will cut interest rates in September, with an outside chance of a 50 basis point cut.The S&P 500 and Dow Jones Industrial Average initially hit fresh record highs, however subsequently pulled back as investors weighed the weaker economic outlook and whether Fed action would be enough.
For the week the S&P 500 ended 0.3% higher, with sector performance mixed. Energy was the notable laggard following oil prices lower, while communication services outperformed which was supported by strength from Alphabet following a long-awaited antitrust ruling coming in less severe than expected. The Dow Jones was down 0.3% while the tech-heavy Nasdaq Composite ended 1.1% higher. Treasury yields moved lower overall, owing to the weak jobs data. The 30-year yield had briefly touched 5% on Tuesday but pulled back to end the week at 4.77% while the 10-year yield was down to 4.09%.
European yields showed some signs of stabilisation on the growing expectations of Fed rate cuts, but still came under pressure on debt concerns. Earlier in the week the yield on the 30-year French government bond rose to its highest level in over 16 years, up at 4.5%, while the UK 30-year Gilt had jumped to its highest point since 1998 before easing as the week progressed. For equities, the pan-European STOXX 600 ended the week 0.2% lower, while regional performance was mixed. The UK FTSE 100 was up slightly, while France’s CAC 40 fell 0.4% ahead of Monday’s no confidence vote. Eurozone inflation rose 2.1% in August, edging marginally above the European Central Bank’s 2% target and reinforcing expectations of no rate cut at its next meeting.
Japanese equities logged gains for the week, with the Nikkei 225 up 0.7%. Japanese government bond yields also eased and the yen weakened against the US dollar. Stocks, particularly autos, received a boost after President Trump signed an executive order to implement lower tariffs on Japanese automobile imports and other products, while Japan will invest $550bn into US projects. The Hang Seng gained 1.4%, with Alibaba’s Hong Kong listed shares surging on Monday following its quarterly earnings, whereby artificial intelligence helped lift its cloud computing business. In contrast the Shanghai Composite dipped 1.2%, pulling back from its recent rally and growth concerns creeping in.
Weekly macro highlights
US non-farm payrolls slow in August
US non-farm payroll employment rose by 22,000 in August according to data published by the Bureau of Labor Statistics (BLS). The data was below market expectations for a 75,000 increase and the upwardly revised 79,000 recorded in July. The change in employment for June was revised down by 27,000 to -13,000 meaning that with the 6,000 upward revision to July’s data, employment in June and July combined is 21,000 lower than previously reported. The healthcare sector added 31,000 jobs in August, the most of any sector. Federal government employment fell by 15,000 in August and is down by 97,000 since reaching its peak in January. The household survey data collected by the BLS showed a 288,000 increase in employed persons, well above the 22,000 increase reported in the establishment survey. This reflected the labour force growing by 436,000 persons, 148,000 of which were unemployed. The unemployment rate rose slightly from 4.2% to 4.3%.
US ISM PMIs improve in August
The US ISM Manufacturing purchasing managers’ index (PMI) rose from 48.0 in July to 48.7 in August, remaining below the 50 level separating expansion and contraction. The data was below market expectations for an increase to 49.0 and marked the sixth consecutive month of contraction. The ISM Services PMI rose from 50.1 in July to 52.0 in August, its thirteenth consecutive month in expansion territory. The new orders component was strong for both sectors, rising to 51.4 for the manufacturing sector after six consecutive months of contraction and increasing from 50.3 to 56.0 for the services sector. However, production, which had grown in July, slipped back into contraction at 47.8 for the manufacturing sector. Contrasting this was the increase in the services sector business activity component, which rose from 52.6 to 55.0 in August. Although the prices component remained in expansion, the growth rate was slower for both sectors in August.
Eurozone inflation increases to 2.1% in August
Eurozone harmonised index of consumer prices (HICP) inflation rose from 2.0% year-on-year (YoY) in July to 2.1% YoY in August according to a flash estimate published by Eurostat. The data was above market expectations for inflation to remain unchanged at the European Central Bank’s 2% target. Among the components of headline inflation, food, alcohol and tobacco remained the strongest drivers of price growth, rising 3.2% YoY. Within this category, unprocessed food made a significant contribution, rising 5.5% YoY in August. Services strongly contributed as well, rising 3.1% YoY in August. Meanwhile, energy recorded a 1.9% YoY fall in August, above the 2.4% YoY decline in July. Tuesday's data showed core inflation, which excludes energy, food, alcohol and tobacco, was stable at 2.3% YoY in August. Among major eurozone economies, Germany's annual inflation rose from 1.8% in July to 2.1% in August. Spain and Italy recorded 2.7% and 1.7% YoY inflation respectively, both unchanged from the previous month.
