Expecting a softish jobs report to start September macro data. Overall, see inflation risks to downside = upside for equities

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Today’s note will include a short video update. We discuss: Why we expect markets to gain 2%-3% in September, supported by falling inflation and softening labor markets.  The key to watch is Fed fund futures and 10-yr yields.  But the probabilities favor an up month given the soft August and the YTD gains already (Duration: 7:05).

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Equity markets finished down 2% for August, consistent with our view that August would be “a tough month” for stocks. And since 8/23, we timidly decided to shift back to “risk on.” And as we look towards September, we expect September to be a positive month for equities. And you might be wondering what sort of things we are watching and what events could lift markets. This is what we want to cover in this note:

• Foremost, we believe economic momentum is cooling in a favorable way, and specifically, labor market and hiring pace is slowing. The August ADP and July JOLTS report this week underscored this. And we believe today’s August NFP (payrolls report) will show a continued slowing in jobs market.
  – Street consensus is looking for +170k jobs
  – Economist Jeff Young of Deep Macro sees +117k, a big downside miss
  – a downside read (below consensus) would be risk assets positive
• Equities fell yesterday (Thu), in part because investors do not want to be caught on the wrong side of the August jobs report. But a miss is a better outcome. Why? Economists worry a continued strong jobs market will drive ever higher wages and therefore push inflation pressures and expectations higher. Obviously, markets prefer to see softer wage pressures and a cooling jobs market.
• After the 9/1 August jobs report, the next real set of inflation data points will be the week of Sept 11th, when August CPI and PPI are released. We expect the majority of incoming economic data in September to show a similar pattern of cooling inflation and softening labor markets. One reason we believe the soft inflation prints of June and July will be repeatable is the role of housing and autos.
• And even Atlanta Fed’s Bostic made a similar comment yesterday if “not for the stubborn (and lagging) housing services prices, the core CPI would be running at 2.6%…underlying inflation may well be close to our target already”, will lead markets to calibrate their views on inflation lower. See tweet.
• Will markets be surprised by a drop in inflationary pressures or by a softening job market? We believe the best way to measure this is to look at two key metrics:
  – Fed fund probability of hikes in Sept and Nov
  – US 10-year yields
• First, fed funds probability of rate hikes in Sept and Nov surged last week to 23% and 48% respectively on the heels of Fed Chair Powell’s comments at Jackson Hole. They have since cooled, aided by softish readings on jobs and July PCE (yesterday).
  – currently those are pricing 11% and 37% odds, respectively
  – but we think these probabilities fall eventually to 0%
• Second, we expect the 10-year yield to fall if inflationary pressures and labor market strength are easing. How low should 10-year yields fall? That is hard to know:
  – in April 2023, 10-year yields fell to as low as 3.24%
  – they have steadily climbed since, surging to 4.36% early last week
  – we think lower yields will generally be viewed as positive for equities
• The VIX has already tanked to 13.57, the lowest close since July 31. Think about that. The VIX has essentially unwound all of the anxiety built up during the month of August. So this reversal is a positive sign.
• And finally, our conversations with investors show many are generally wary about markets in September to October. Part of this is typical seasonals (September generally weak) and part of this is mid-term election cycle year dynamics. And our Head of Technical Strategy, Mark Newton, believes stocks need to surpass (move above) some key levels before he believes a sustainable low is in place.

BOTTOM LINE: In the coming weeks, we believe stocks will surprise to the upside and gain +100 to +150 points in September.

Bottom line, we believe consensus caution of September will prove to be unwarranted. In fact, we believe September probabilities favor a gain of 2% to 3%, supported by a downward shift in consensus views around inflation and inflation risks.

• one of the keys is to see markets price out hikes in September and also November (odds fall)
• another is to see interest rates generally fall, as they have marched higher substantially in August
• finally, markets need to avoid external negative shocks
• one of those is the potential for a UAW strike

Key incoming data September

•  9/1 8:30am ET August Jobs Report
•  9/1 10am ET August ISM Manufacturing
•  9/1 FDIC 2Q23 Quarterly Banking Profile (date subject to change)
•  9/6 10am ET August ISM Services
•  9/6 2pm ET Fed releases Beige Book
•  9/7 11am ET Manheim Used Vehicle Index August Final
•  9/8 2Q23 Fed Flow of Funds Report
•  9/13 8:30am ET August CPI
•  9/14 8:30am ET August PPI
•  9/15 8:30am ET September Empire Manufacturing Survey
•  9/15 10am ET U. Mich. September prelim 1-yr inflation
•  9/15 Atlanta Fed Wage Tracker August
•  9/18 8:30am ET September New York Fed Business Activity Survey
•  9/18 10am ET September NAHB Housing Market Index
•  9/20 2pm ET September FOMC rates decision
•  9/21 8:30am ET September Philly Fed Business Outlook Survey
•  9/22 9:45am ET S&P Global PMI September Prelim
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  9/26 9am ET July S&P CoreLogic CS home price
•  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

• 8/1 10am ET July ISM Manufacturing Tame
• 8/1 10am ET JOLTS Job Openings Jun Tame
• 8/2 8:15am ADP National Employment Report Hot
• 8/3 10am ET July ISM Services Tame
• 8/4 8:30am ET July Jobs report Tame
• 8/7 11am ET Manheim Used Vehicle Index July Final Tame
• 8/10 8:30am ET July CPI Tame
• 8/11 8:30am ET July PPI Tame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker July Tame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
• 8/29 9am ET June S&P CoreLogic CS home price Tame
• 8/29 10am ET Aug Conference Board Consumer Confidence Tame
• 8/29 10 am ET Jul JOLTS Tame
• 8/31 8:30am ET July PCE Tame
• 9/1 8:30am ET August NFP jobs report
• 9/1 10am ET August ISM Manufacturing

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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