August has begun with a bang, with the Dow ending the first session of the month down almost 500 points. Note that's only a
1.2% decline (the Dow crossed 40K points for the first time in May), but the selloff yesterday also hit the S&P 500 (
-1.4%), Nasdaq (
-2.3%) and Russell 2000 (
-3%, so much for the rotation). Volatility is making an appearance as markets try to size up the economic landscape, while the 10-year Treasury yield (
US10Y) slid below 4.00% for the first time since February.
What happened? Things seemed to be celebratory on Wednesday after Fed Chair Jay Powell announced that a September rate cut was
on the table, but that message took on a different tone as new economic data was published. Initial jobless claims advanced
the most since August 2023, while the PMI and ISM manufacturing indexes
signaled an economic contraction. The weak data is now triggering some worries that the Fed may fall behind the curve, with the U.S. becoming the last major central bank in the West to embark on an easing cycle.
That's at least one of the narratives, which is even bringing back a word that hasn't been heard for a while - "recession." The other is that the soft landing is going according to schedule, but a healthy summer pullback or even a correction is due following stretched valuations, especially for megacaps and tech sectors like semiconductors. "The economy shows resilience with 2.8% GDP growth in the second quarter,"
wrote SA Investing Group Leader Lawrence Fuller. "Most importantly, consumer spending rose 2.3% and was the largest contributor to growth. Despite some signs of fatigue, the consumer is alive and well."
Next up: The July nonfarm payrolls report is due out at 8:30 AM ET as Fed policymakers shift more attention to the maximum employment part of the central bank's mandate compared to inflation and wages. Economists are not expecting a huge shift in the jobs number from May (the consensus estimate is for 176K), but recently, revisions have
been shifting downward. The employment rate is also expected to stay at 4.1%, but anything higher than that can trigger concerns, especially with the figure climbing from a low of 3.4% over the past year.
