Conflicting Signals

Cuts Coming Or...

Powell’s Jackson Hole speech resulted in the market now pricing in a roughly 90% chance of a rate cut at the September meeting. His focus has now shifted to the softening labor market where job growth has averaged just 35,000 per month over the last quarter, compared to 168,000 in 2024. This policy change triggered an immediate market rally, with the S&P 500 index climbing 1.5%, and small caps rising even more. The market's strong reaction shows how confident investors are about the Fed potentially easing monetary conditions despite ongoing inflation concerns linked to economic recovery.

However, the latest economic data is presenting conflicting signals that complicate the overall view. In August, manufacturing growth exceeded expectations, highlighted by a rise in the S&P Global US Manufacturing PMI to 53.3, the highest level since May 2022. Production has accelerated for three consecutive months, and factory employment rebounded substantially after July's decline. On the other hand, jobless claims tell a different story. While the 235,000 initial jobless claims figure reported for the week ending August 16 largely aligned with numbers we’ve seen for several weeks, continuing claims reached 1.972 million, the highest since November 2021. These mixed signals are making it challenging to evaluate the economy and the state of the labor market.

Retail earnings showed surprising strength despite ongoing tariff effects. Walmart reported a 4.6% rise in comparable U.S. sales and has revised its full-year outlook, demonstrating its ability to attract budget-conscious shoppers from all demographics. The retail giant's e-commerce sales grew by 25%, while marketplace sales surged by an impressive 40%. With Home Depot seeing income rising by 1.4% in its last quarter, a period marked by stagnation, home improvement retailers are seeing gradual growth. It is particularly noteworthy how major chains have strategically managed tariff challenges by implementing selective price reductions instead of broad increases, allowing them to keep customers during this difficult time.