JOLTS data for July showed the number of US job openings fell to 8.8 million from 9.2 million in June and compared with consensus forecasts for 9.5 million. The number of people quitting their job fell by 253,000 to 3.5 million, although the quit rate was only modestly lower at 2.3% (2.4% previously). The Conference Board’s consumer confidence index declined to 106.1 in August from 114 in July, compared with expectations for 116. Both the present situation and consumer expectations indexes fell.
The data bolstered hopes that the Federal Reserve is close to the end of the rate hiking cycle. The S&P 500 rallied 1.45%, the largest daily rise since the beginning of June, in a broad-based advance led by tech stocks. The Nasdaq closed 1.7% higher. Yields on 10-year US Treasuries dropped 8 basis points to 4.12% and on two-year US Treasuries by 15bps. The chances of a further Federal Reserve rate hike by November implied by market pricing dropped from around 70% prior to the data to around 50% by the close.
What’s the outlook?
As highlighted in our recent Marketheimer blog, contradictory evidence and conflicting interpretations of data, asset pricing, and Fed policy are pulling markets in opposing directions, netting out to no clear direction overall.
This week’s data so far has pointed toward the more benign outcome, but a number of questions—without easy answers—remain outstanding. Are consumers still in good shape or will they soon crack under the weight of higher rates? Is the neutral fed funds rate (r*) 2.5% or a lot higher? Are higher 10- and 30-year yields bad for growth, or do they reflect a better growth outlook?
Our take is that the US consumer, and therefore the economy, should remain fairly resilient well into 2024. But monetary policy is restrictive (debates about just how restrictive aside) and this will weigh on consumer spending and growth in the coming quarters. That should result in long-end yields trending lower by year-end, even if the fundamental case for a higher neutral rate and yields in the long term has merit.
How do we invest?
Our base case is that the Fed has already reached the end of its tightening cycle, but views on the Fed could continue to shift in response to data over the coming weeks. We now see the risk-reward for equities as more balanced and recently upgraded global equities to neutral.
Robust economic data have boosted bond yields, providing investors with a good opportunity to lock in currently elevated rates for an extended period. In fixed income, we like opportunities in the 5–10-year duration segment in high grade (government), investment grade (incl. select senior financial debt), and sustainable bonds.
Exposure to actively managed income strategies and yield-generating structured investments can help investors take advantage of the breadth of opportunities. Quality dividend-paying stocks can be a good source of income and can enhance potential equity returns at a time when the risk-reward outlook for broad indexes appears muted over a tactical horizon.
Main contributors - Solita Marcelli, Mark Haefele, Jason Draho, Vincent Heaney, Jon Gordon
Original report - Stocks rally as US labor market softens, 30 August 2023.