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Setting the stage for Fed Chair Powell tomorrow
With yesterday’s July Fed meeting minutes pointing to a likely rate cut in September and more recent economic data that supports such a move, the market is waiting to see if Fed Chair Powell’s comments tomorrow bring even more support. Recent developments, including this week’s revision that revealed the labor market added 818,000 fewer jobs than previously reported, suggest the odds of Powell’s tone being even mildly hawkish is low. To us, the bigger question is will those comments be as dovish as the market hopes?
That dovish expectation could be reset based on what the market sees in today’s Flash August PMI data from S&P Global, which will be released at 9:45 AM ET. The Flash Manufacturing PMI is expected to remain in contraction territory with a 49.6 reading, and the market expects a Flash Service PMI figure of 54, down a tick from 55 in July, but still growing. How the composite of those two buckets comes in will be of interest, but ahead of Powell’s comments, the market is likely to place as much focus on the preliminary August temperature for job creation and inflation compared to the last few months.
Following the market rally of the last few weeks, one that has the S&P 500 up almost 10%, signs point to the stock market being near-term overbought. Should today’s August Flash PMI report provide further evidence of a cooling economy, odds are the market will move deeper into being short-term overbought. However, if this report finds the economy is on stronger footing, it could lead investors to take profits, especially as we approach what has traditionally been one of the toughest months for the market.
There is also a potential wild card the market will have to factor into its thinking as it digests that incoming data - the shutdown duration for two of Canada’s major railroads. Estimates suggest that nearly a third of the freight handled by Canadian National (CN) and Canadian Pacific Kansas City Southern (CP) crosses the US-Canadian border. At risk is a disruption to several US industries, including agriculture, autos, home building, and energy. When we hear “disruption” our thinking quickly goes to the risk of renewed supply chain and inflation risks. The duration of the shutdown will be key for those issues and the overall headwind to the economy. We will be interested to see how Powell addresses those risks, if he does, in his comments tomorrow.
Next Week
The next edition of Thematic Signals will be published on Tuesday, September 3. Have some fun in the balance of August and a wonderful Labor Day holiday if you reside in the US. Because of that, we’ll point out that next week brings another swath of retailer earnings, including Nordstrom (JWN), Abercrombie & Fitch (ANF), Foot Locker (FL), and Kohl’s (KSS). Those results and guidance will bring more color for the consumer and our Cash-strapped Consumer model.