Tag: ISM Services PMI

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Weak jobs and falling crude = September rate cut

Key Points

  • The Fed will likely cut interest rates in September after a weak jobs report.
  • Falling crude oil prices also ease inflationary pressure.
  • Long-term Treasury yields fall, anticipating a rate cut.
  • The dollar weakened as yields softened, while gold soared to a new high of $3,600 per ounce.

The August labor report disappointed with a low 22,000 job growth compared to an expected 75,000. Another June data revision saw jobs contract by 13,000, after initial reported gains of 147,000 were revised down to 14,000 last month.

Employment Growth

Growth in total weekly hours worked came to a complete halt in August, with annual growth falling to 0.7%. Real GDP growth will likely follow.

Total Hours Worked

The uptrend in continued claims confirms the August rise in the unemployment rate to 4.3%.

Unemployment

The unemployment level ( 7.4m ) now exceeds job openings ( 7.2m ), but only by 200K.

Job Openings

Temporary jobs fell to 2.5 million, a level typically seen during recessions.

Temporary Employment

Layoffs and discharges are in an uptrend.

Layoffs & Discharges Rate

The 2.0% quit rate indicates that employees are no longer confident in finding new jobs.

Quit Rate

Average hourly earnings growth slowed to an annualized rate of 3.3% in August, but year/year growth was steady at 3.9%, still indicating a balanced labor market.

Average Hourly Earnings

Crude Oil

OPEC+ has injected a lot of downside pricing risk into the oil markets this week, fueling speculation that the second wave of voluntary cuts totaling 1.65 million b/d could be unwound much quicker than previously expected. According to news reports, Saudi Arabia is interested in pushing ahead with the unwinding during the September 7 meeting, citing the need to regain market share. (OilPrice.com)

The move has the potential to create a massive oversupply. Brent crude fell to $65.50 per barrel on Friday, but if the Saudis succeed, expect a test of support at $60. Falling crude prices would squeeze shale producer margins, causing a drop in US production.

Brent Crude

Lower energy prices would ease inflationary pressures in the US, allowing more room for Fed rate cuts.

ISM Services

The ISM services PMI improved to 52% in August, indicating expansion.

ISM Services PMI

New orders jumped to 56%, signaling an improving outlook.

ISM Services New Orders

However, services employment signals contraction, confirming the weak labor report.

ISM Services Employment

A steep 69.2% for the prices sub-index also warns of strong inflationary pressures.

ISM Services Prices

Contracting employment and rising prices in the large services sector warn of stagflation. We expect the Fed to cut in September, but then pause to see how this affects prices.

Stocks

A weak labor report is a bearish sign for stocks despite the prospect of a Fed rate cut. A reversal of the S&P 500 below support at 6400 would warn of a correction.

S&P 500

We expect the Dow Jones Industrial Average to test support at 45,000. Respect of support would confirm another advance. A breach is less likely, but would signal a test of 44,000.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed Index retreated to -0.526, warning that financial conditions are tightening.

Chicago Fed National Financial Conditions Index

Tighter financial conditions are also highlighted by a decline in bank reserves to below $3.2 trillion.

Commercial Bank Reserves at the Fed

Bitcoin is testing support at 110K. A breach would warn of a swing to risk-off in financial markets, which would be bearish for stocks.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields plunged to 4.09%, heading for a test of long-term support at 4.0% as speculators pile into bonds ahead of the expected September rate cut. However, we have warned of the risk that long-term yields rise in response to a Fed cut — as in September last year.

10-Year Treasury Yield

Dollar & Gold

The dollar weakened in response to the poor jobs report, anticipating falling interest rates.

Dollar Index

Gold surged to a new high at $3,600 per ounce before closing at $3,587. Expect another test of support at $3,500, but respect will likely confirm another advance — and our year-end target of $4,000.

Spot Gold

Silver is retracing to test support at $40, but respect will likely confirm another advance and a target of $44.

Spot Silver

Conclusion

Weak jobs growth in August warns that economic growth is slowing, but the ISM services report warns of strong price pressures in the services sector. We expect a Fed rate cut in September but then a pause as the Fed remains wary of stagflation, with low growth and rising prices.

We expect the dollar to weaken in response to rate cuts, with gold and silver soaring to new highs.

The Fed should take care to avoid a repeat of last September, when Fed rate cuts sparked a sell-off in long-term Treasuries, signaling the bond market’s displeasure with monetary and fiscal policy. We believe they will aim for a gradual decline, with a pause after the September cut to assess the impact of tariffs and a slowing economy on prices.

A Saudi move to increase crude oil production would likely drive Brent crude to $60 per barrel or below, giving the Fed more room to cut rates.

Acknowledgments

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Inflation spooks Treasuries and stocks

Rising inflation expectations and robust economic data mean the Fed will likely pause rate cuts for several months. Stocks reacted negatively, but gold seemed unfazed.

The US economy shows slow but steady growth, with total weekly hours worked growing at an annual rate of 1.0% compared to real GDP at 2.5% in 2024.

Real GDP & Total Hours Worked

Heavy truck sales, a reliable leading indicator, fell sharply in December but rebounded to a robust 44.5K in January.

Heavy Truck Sales

Another reliable leading indicator is employment in cyclical sectors, which also shows robust growth. In a recession, manufacturing, construction, and transportation & warehousing typically shed far more jobs than the rest of the economy.Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Survey

ISM business surveys show continued expansion in the services sector in January.

ISM Services PMI

It was joined by a manufacturing recovery above 50% after 26 months of contraction.

ISM Manufacturing PMI

Labor Market

The labor market added a modest 143K jobs in January.

Employment Growth

However, the unemployment rate fell to 4.0% from 4.2% in November, possibly aided by a surge in deportations.

Unemployment

Average weekly hours worked fell to 34.1 for the first time since the 2020 pandemic. This typically serves as an early warning of increased layoffs. Employers first cut back hours before shedding staff.

Average Weekly Hours

Lower weekly hours is contradicted by the JOLTS report, which showed job openings exceeding unemployment in December.

Job Openings

Average Hourly Earnings

A sharp increase in average hourly earnings, showing 4.1% growth for the 12 months to January, will likely cause concern at the Fed.

Average Hourly Earnings

December earnings growth surprised, at close to 0.5% for the month or 5.7% annualized.

Average Hourly Earnings - Monthly

University of Michigan Survey

Consumer sentiment dipped slightly in February, with the 3-month moving average declining to 71. Sentiment remains below levels during the 2020 pandemic.

University of Michigan: Consumer Sentiment

The current economic conditions index declined to 68.7 in February, but the 3-month MA is still rising.

University of Michigan: Current Economic Conditions

Expectations are also falling, with the 3-month MA declining to 70.

University of Michigan: Consumer Expectations

Financial markets were spooked by the sharp jump in expected price increases in the next 12 months, which reached 4.3% in February, with the 3-month MA at 3.5%.

University of Michigan: 1-Year Inflation Expectations

Five-year inflation expectations are also rising, with the 3-month MA climbing to 3.2% in February.

University of Michigan: 5-Year Inflation Expectations

Treasury Market

Ten-year Treasury yields rallied in response to the stronger inflation outlook, testing resistance at 4.5%. Recovery above the descending trendline would warn of another advance.

10-Year Treasury Yield

Stocks

The S&P 500 fell sharply in response to the prospect of higher interest rates. Breach of 5850 would signal a test of primary support at 5800.

S&P 500

Dollar & Gold

The Dollar rallied, testing resistance at 108 in response to higher interest rates. Breakout would offer a short-term target of 110.

Dollar Index

Gold is retracing to test support at $2,850 per ounce. Respect would signal a test of $3,000.

Spot Gold

Silver broke its new support level at $32 per ounce, warning of retracement to test $30.

Spot Silver

Conclusion

Strong growth in average hourly earnings and rising consumer inflation expectations will likely cause the Fed to pause rate cuts until the current uptrend reverses. That could take more than six months.

10-year Treasury yields are expected to resume their uptrend. Recovery above 4.5% would confirm.

Rising long-term yields are bearish for stocks, with the S&P 500 likely to test primary support at 5800.

The Dollar Index is also expected to resume its uptrend. Breakout above 108 would signal another test of resistance at 110.

Gold is expected to continue its uptrend, with a breakout above $2,900 per ounce signaling a test of $3,000 for the first time. Rising inflation expectations and increased bullion holdings by foreign central banks will likely maintain a shortage of physical gold.

Acknowledgments

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The elephant in the room

A weak seasonally-adjusted increase of 175K in non-farm payrolls had a surprisingly bullish effect on stocks. The increased prospect of rate cuts from the Fed excited investors. The opposite of what one would expect from a sign that the economy is slowing.

Markets are focused on the immediate impact of shifts in data and policy but ignoring the elephant in the room — the long term consequences of current monetary and fiscal policy.

Labor market

Job growth slowed to 175K jobs in April, the lowest since October 2023.

Non-Farm Employment

Average hourly earnings growth remained low at 0.20% in April (2.4% annualized), signaling that inflationary pressures are easing.

Average Hourly Earnings Growth

The unemployment rate is still low at 3.9%. The Sahm Recession Indicator is at 0.37. Devised by former Fed economist Claudia Sahm, the indicator signals the start of a recession when the red line below rise to 0.50%.

The Sahm Rule signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.

The rule has proved a reliable recession indicator in the past but we need to remember that: (a) it is not a leading indicator and normally only crosses above 0.5% after the start of a recession; and (b) this is a far from normal labor market.

Sahm Rule & Unemployment Rate

Non-residential construction jobs are way above previous highs as the industry benefits from fiscal spending on infrastructure and the drive to on-shore key industries such as semiconductors.

Non-Residential Construction Jobs

Average hourly earnings growth (green below) slowed to 4.0% for the 12 months to April (for production and non-supervisory employees) indicating that inflationary pressures are easing. In the past, average hourly earnings growth above the unemployment rate (blue) has caused high inflation as in the 1970s (red circle).

Unemployment Rate & Average Hourly Earnings Growth

Economic Activity

Aggregate weekly hours worked are growing at an annual rate of 1.8%. This is below the rate of real GDP growth, suggesting either that (a) productivity gains from AI and other new technologies are having an effect; or (b) real GDP growth is likely to slow.

Real GDP & Aggregate Hours Worked

The GDPNow model from the Atlanta Fed forecasts an optimistic 3.3% annualized real growth rate in Q2.

GDPNow

But the Lewis-Mertens-Stock Weekly Economic Index is far more cautious at an annualized rate of 1.7% for Q2 (so far).

Real GDP & Weekly Economic Index

ISM Services PMI declined to 49.4% for April, indicating a contraction in the large services sector. Earlier, the ISM Manufacturing PMI was slightly weaker, at 49.2%.

ISM Services

The Services New Orders sub-index remains above zero, suggesting some improvement ahead.

ISM Services - New Orders

The Employment sub-index, however, shows a sharp contraction, falling to 45.9%. The services sector is the major employer in the economy and the negative outlook warns that overall jobs growth could slow rapidly.

ISM Services - Employment

The Prices sub-index, on the other hand, warns of persistent inflation, rebounding to a strong 59.2%.

ISM Services - Prices

Financial Markets

Bitcoin rallied strongly to again test resistance at $64K. Respect of resistance, signaled by a fall below $61K, would confirm the down-trend and warn of contracting liquidity in financial markets.

Bitcoin (BTC)

The Chicago Fed Financial Conditions Index recovered slightly to -0.47, also warning that easy monetary conditions are receding.

Chicago Fed Financial Conditions Index

Ten-year Treasury yields declined on news of the weak labor report, testing support at 4.5%. Breach would indicate a decline to 4.2%.

10-Year Treasury Yield

The S&P 500 jumped above resistance at 5100, suggesting another test of resistance at 5250. But we first expect retracement to test support.

S&P 500

Gold & the Dollar

The Dollar weakened in line with falling Treasury yields, with the Dollar Index testing support at 105. Breach would signal a correction, with follow-through below 104 signaling end of the up-trend.

Dollar Index

Gold continues to test support at $2300 per ounce. If support holds, with recovery above $2350, the shallow correction would be a bull signal, suggesting another strong advance. Otherwise, a test of $2200 is likely.

Spot Gold

Crude Oil

Brent crude broke support at $84 per barrel as tensions in the Middle East ease. Follow-through below support at $82 would warn that the up-trend has weakened and is likely to reverse.

Brent Crude

Conclusion

Financial markets, like Pavlov’s dog, are conditioned to react bullishly to rate cuts. Long-term Treasury yields declined and stocks jumped in response to a weak labor report. However, weak jobs growth is not a bull signal, suggesting that the economy is likely to slow. This is borne out by a weak ISM Services PMI for April, warning of a contraction.

The unemployment rate remains low but average hourly earnings growth is declining, indicating that inflationary pressures are easing. ISM Prices sub indices for both Manufacturing and Services, however, warn of strong producer price pressures.

Brent crude broke its rising trendline and follow-through below the next support level at $82 per barrel would warn of reversal to test primary support at $75. Declining energy prices would help to ease inflationary pressures.

The Fed is likely to hold off cutting rates until the outlook for inflation is clearer.

Gold could weaken to $2200 per ounce in the short- to medium-term — if it can break stubborn support at $2300. But we remain long-term bullish on Gold. The elephant in the room is Government debt which is growing at a rate of more than $1 trillion a year, with little prospect of a bipartisan agreement in Congress to address the shortfall. The chart below shows the bipartisan CBO’s projection of federal debt as a percentage of GDP from 2024 to 2054.

CBO Projections of Federal Debt

The only practical way to solve this is to increase GDP at a faster rate than the debt, through inflation. That would erode the real value of the debt but is likely to send Gold and other real assets soaring.

Acknowledgements



Posted on

Gold soars as UST yields fall

The S&P 500 has retraced to test short-term support at 5050, accompanied by a retreat in the Equal-Weighted Index and Russell 2000 Small Caps. The outlook remains bullish, however, with Trend Index troughs high above zero signaling extraordinary buying pressure.

S&P 500

Bond market anticipation of June rate cuts is growing. 10-Year Treasury yields broke support at 4.20%, signaling a decline to test support at 3.80%.

10-Year Treasury Yield

Gold is at a new high of $2129 per ounce. We expect retracement to test support at $2080 but respect would offer a ST target of $2180 per ounce.

Spot Gold

Gold versus TIPS

Economic Activity

ISM Services PMI recorded its 14th month of expansion in February, retreating to 52.6% from 53.4% in January. The decline suggests continued but slower growth.

ISM Services PMI

Crude & Commodities

Nymex WTI light crude continues to respect resistance at $80 per barrel. Breach of $78 would suggest a correction to the ascending trendline at $75.

Nymex Light Crude

Copper continues to test resistance at $8500 per metric ton, indicating some resilience in the Chinese economy — by far the biggest buyer of industrial metals.

Copper

In China, Caixin Services PMI eased to 52.5 in February, from 52.7 in January — maintaining the expansion since January last year.

Caixin Services PMI

Earlier, Caixin Manufacturing PMI edged up to 50.9, compared to 50.8 in January. But whipsawing around 50 indicates poor and erratic growth which is affecting metals prices.

Caixin Manufacturing PMI

Iron ore continues to test support at $114 per metric ton. Breach would warn of another test of $100. The Chinese government is likely to do enough to keep the economy from collapse but does not have the means to stimulate on a large scale.

Iron Ore

Conclusion

The 10-year treasury yield is expected to test support at 3.80%, offering further upside for Gold.

Our short-term target is $2180 per ounce and our long-term target is $2450.

Acknowledgements

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