Last Friday, I examined several bearish indicators weighing on the US stock market. The trading patterns observed this week through Tuesday have not brought any relief. As of yesterday (Sep. 29), the drawdown for the S&P 500 has deepened, now resting at -11.6%. This decline past the -10% threshold has activated yet another warning signal for the Crash Risk Index (CRI), which is again edging into a alert zone—five of its ten components are now flagged as concerning. A further decline in the market could likely push the index further into red territory, unless the current landscape has already prompted you to retreat from the markets.
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● US consumer confidence index experiences a rise in September | Reuters
● US home prices increase at a slightly accelerated annual rate in July | WSJ
● US exports drop by 3.5% in July compared to the previous year | WSJ
● Redbook reports that US retail sales at chain stores fell by 1.5% in September compared to last year | DJ
● Eurozone headline inflation turns negative in September | RTT
● Germany sees retail spending decrease in August after a strong July | MarketWatch
Private nonfarm payrolls in the US are expected to increase by 172,000 (seasonally adjusted) in tomorrow’s ADP Employment Report for September, as per The Capital Spectator’s average point forecast from various econometric estimates. This average reflects a slight decrease compared to the previous month’s gains in August.
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The likelihood of a Federal Reserve rate hike seems to be plummeting, as suggested by the implied inflation forecast derived from the yield spread between nominal and inflation-indexed Treasuries. This downward trend is particularly stark for 10-year maturities, which are currently indicating a future US inflation rate of just under 1.4%—the lowest level observed since the end of the last recession in 2009 (based on daily Treasury.gov data as of Sep. 28). This figure significantly lags behind the Fed’s target of 2%. While the reliability of Treasury market projections on inflation is always in question, it’s evident that market sentiment is tending to lower expectations regarding future inflation.
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● US personal spending increased by 0.4% in August, matching July’s growth | BEA
● US disposable personal income rose by 0.4% in August, compared to 0.5% in July | BEA
● US pending home sales dipped in August, yet remain at a “healthy” level | NAR
● According to the Dallas Fed, manufacturing contraction has eased in September | Dallas Fed
● The Eurozone Business Climate Indicator has slightly improved in September | EC
Today’s positive report regarding US personal income and spending for August has led to an upward revision of the Atlanta Fed’s third-quarter GDP nowcast, bumping it up from 1.4% to 1.8% (seasonally adjusted annual rate). The upgraded GDP forecast for this quarter remains modest and significantly lower than Q2’s robust 3.9% growth. However, it is encouraging to see revisions trending positively. In fact, this latest evaluation of the widely referenced GDPNow model presents the highest projected growth since the Federal Reserve bank began offering Q3 estimates in early August. Though this still stems from a low initial estimate of only 0.9%, it remains a noteworthy development amid a climate of cautious expectations.
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The latest data reveals that consumer spending and disposable personal income—funds remaining after taxes—showed promising increases in August, according to this morning’s report from the US Bureau of Economic Analysis. Personal consumption expenditures grew by 0.4% last month, consistent with July’s increase. Meanwhile, the advance in disposable personal income (DPI) slightly dipped to 0.4% in August from 0.5% in the previous month. Nevertheless, this still indicates a healthy growth rate. Year-over-year changes for both income and spending have consistently remained in the 4% range, indicating that the consumer sector, a key driver of US economic activity, is likely to show steady albeit unspectacular growth in the near future.
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Value investors seeking attractive opportunities have recently turned their attention to the beleaguered segment of emerging market equities. Eventually, the selling pressure will provide a foundation for a robust recovery. However, last week’s trading activity suggests that a shift towards a bullish phase is not imminent. Stocks in emerging markets were the primary drivers of a downward trend last week, particularly as measured by the Vanguard Emerging Markets ETF (VWO), which performed poorly among a range of proxies tracking major asset classes.
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● US Q2 GDP growth was revised upward to 3.9% from 3.7% | BEA
● US Services PMI growth has slightly decreased in September: 55.6 vs. 56.1 in August | Markit
● US consumer sentiment shows a decline in September | Reuters
● Business and consumer confidence rises solidly in Italy during September | RTT
● The US dollar strengthens amid expectations of a Fed rate hike | Reuters
● The head of the IMF indicates a likely downward revision of the global growth outlook | Reuters
While US economic growth has recently experienced a slight downturn, it remains moderate as indicated by this morning’s flash estimate of the Services PMI data for September. Markit’s sentiment benchmark for this sector, which encompasses a significant portion of US economic activity and employment, has dropped to 55.6 in this month’s preliminary reading, down from 56.1 in August. Despite this decrease, it signifies a strong performance and stays well above the neutral indicator of 50.0, which delineates growth from contraction. In summary, the Services PMI underscores that the US macroeconomic trend remains on an upward trajectory.
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