09/09/24: Market cyclicality, US job data & Europe's outlook
Monday Espresso Podcast - 9th September 2024
[00:00:00] Nathan Sweeney: It is Monday, the 9th of September. Today I'm joined by Sarah Tardino, our UK analyst. Good morning, Sarah.
[00:00:06] Sarah Todino: Good morning, Nathan.
[00:00:08] Nathan Sweeney: So let's get some insight from Sarah in a second, but before we do that, I'm just going to recap on what was driving markets, and actually I wanted to give a bit of insight into September in general.
[00:00:19] Nathan Sweeney: So if we look at markets, they were actually off across the board for this week. So most notably some weakness in the US and some weakness in Europe. So I suppose the question is, is there a cyclicality to markets? And interestingly, if we think about knowledge, knowledge is cumulative. So you gain more knowledge over time.
[00:00:39] Nathan Sweeney: Yet, when it comes to markets, it appears that knowledge seems to be cyclical. So it can be driven by things like greed or fear. So if we take September for instance, historically it's been the most volatile month for stocks. So you tend to see that September is a time where those rational thoughts tend to take a backseat to something else.
[00:01:00] Nathan Sweeney: So consider this, over the past decade, the S&P has dropped on average by about 2.3% in September, making it the only month with consistent negative returns. If we zoom out to post World War II, historically, September has delivered you a return of about negative 0.8%. So for me, the question is why, is there some rational economic force at play, or is it simply a reflection of the collective mood of investors?
[00:01:31] Nathan Sweeney: So when you think about September, it brings change. So it's a change of season, but it's also a shift in attitude. Back to school, back to work, the unmistakable signs of autumn, leaves drop from the trees, and importantly, daylight fades. You know, and with that optimism tends to wane. So to me, it's no surprise that sentiment seems to cool around this time of the year when the nights grow longer.
[00:01:56] Nathan Sweeney: So I suppose Sarah, the real question here is. We're seeing this kind of change in sentiment at an investor level, but at an economic level, the data, what is the data saying? Does it paint the same picture or does it paint a different picture?
[00:02:09] Sarah Todino: It paints a different picture. So in the US as you've already mentioned, there was nervousness in markets this week, particularly regarding the US economy.
[00:02:18] Sarah Todino: As we had the release of the US jobs data, the unemployment rate Edge slightly lower to 4.2% in August. And that was down from 4.3%. We also had wages rise by 0.3%. And that's more than the 0.2% in July. So we are seeing signs of improvement.
[00:02:38] Nathan Sweeney: Yes. And that's the real concern here. So markets are pretty much concerned about the fact that perhaps, central banks are cutting rates because we're heading towards a recession.
[00:02:49] Nathan Sweeney: But, you know, from our perspective, what we can clearly see is that central banks are cutting rates because inflation has fallen and the data is okay. So are we seeing examples of that elsewhere? Is that just unique to the US that strength in data?
[00:03:03] Sarah Todino: So in Europe this week GDP growth was 0.2 % in the three months to June.
[00:03:09] Sarah Todino: So although it's down from the 0.3% in the first quarter this year, it is still positive growth. And looking at the economies within Europe, we've had positive GDP growth from France, Italy, Italy, and Spain but there was contraction in Germany. Within Germany we did hear from Volkswagen. They're looking at cost cutting measures and considering the closure of factories for the first time in their history.
[00:03:34] Sarah Todino: So there were signs of a manufacturing slowdown but that said composite PMI does remain in expansionary territory. It's at 51 for August for the Eurozone. So despite that prolonged manufacturing PMI data in contractionary territory, it's largely due to the positive contribution from the services sector.
[00:03:54] Sarah Todino: So as a reminder here, the score for PMI data above 50 is expansionary and below 50 is contractionary.
[00:04:03] Nathan Sweeney: Yeah. And then importantly, so for PMI, it's a survey of purchasing managers. So people who work in specific sectors who are responsible for hiring, buying stuff. And, you know, it really tells you the mood of those specific sectors.
[00:04:18] Nathan Sweeney: So when you see it expanding, that tends to send a positive signal about what's happening in the underlying economy. Now we talked about the US, we talked about Europe, closer to home, how's the UK faring in all of this?
[00:04:28] Sarah Todino: Well, in the UK this week, we had retail sales data in August. We saw a rise of 0.8% from a year ago on a like for like basis.
[00:04:39] Sarah Todino: And that was largely due to some warmer weather with people spending more money on clothing and food. And it's also the highest level we've seen in five months now and again, linking back to our PMI data, we had some positive composite PMI data for the UK standing at 53.8 for August, and that's with both services and manufacturing PMI in expansionary territory.
[00:05:03] Nathan Sweeney: Yeah. So I think the key message there is, you know, perhaps investors are paying too much attention to what's happening outside of the world, investing and letting, those emotions drive what's happening in markets and ultimately that doesn't tend to last for long because as we can see, the data is quite supportive.
[00:05:20] Nathan Sweeney: Speaking of which, as we move into the week ahead, there'll be lots of things for investors to look at, including inflation data from the US which is expected to come in at 0.2% for the month. So again, inflation really kind of running at much lower levels today. So less of a concern. Big news will be the ECB.
[00:05:39] Nathan Sweeney: So the European central bank is expected to cut interest rates. So currently those interest rates are 4.25% and expected to be cut to 4%. So all eyes on the ECB next week or the European central bank. Okay. Take care. Thank you for listening and have a great week.
