Sept off to a weak start, but key data coming later this week. Bottoming of US PMIs strengthens case for Industrials $XLI

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We discuss why we remain constructive on the market for September despite Tuesday’s minor selloff in equities and rise in November hike odds. Manheim release this week and CPI/PPI next week are the key events to watch. Bottoming of ISM PMI strengths the case of Industrials.

Please click below to view our Macro Minute (Duration: 7:31).

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Investors are generally cautious on equities for September, and the weakness seen Tuesday will undoubtedly strengthen those concerns. The S&P 500 fell 19 points, or -0.4%, but it felt worse because this decline saw a rise in yields (US 10-yr +8bp) and rise in oil (+1.3% to $87) and the VIX also inched up barely to a still low 14. But our base case remains that we see stocks higher in September, driven by what we expect to be softer inflation data (used cars, CPI) along with further evidence of softening labor (revised -355k this year). And collectively, this would change consensus view on future rate hikes, which in turn is supportive of equities.

• Fed Governor Chris Waller was interviewed on CNBC yesterday and he noted that while last week was “hell of good data” supporting a Sept pause, he also noted that “one more hike would necessarily throw the economy into a recession if we do feel we needed to do one.” That latter comment could be a reason the odds of a November hike jumped to 41.4% yesterday, up +930bp. And this possibly also pressured longer term rates as the US 10-yr yield moved to 4.264% (up 8bp). These are conditional statements, and not necessarily arguing that a Nov hike is necessary. But it does show where the Fed perspective sits, and many remain unconvinced the economy has softened sufficiently.
• Another headwind for stocks over the past few days is the rise in oil prices. WTI crude has risen almost $10 to $87 in just the past 7 sessions and the highest levels since November 2022. The Saudi production cuts is the driver and this time, the US does not really have excess reserves to release from the SPR (strategic petroleum reserve) and thus, investors are naturally wary of these moves.
• To us, the bigger story this month is we expect core inflation trajectory to come in softer than consensus, and this lead to the market and the Fed repricing the future path of rate hikes. The most notable being we believe the Fed will not hike in September and not in November. Currently, Fed funds sees 6.8% and 41.4% probability of hikes in Sept/Nov, respectively.
• The two data points in the coming weeks are the following:
  – 9/8 9am ET: Manheim used car prices <– we expect this to be another soft report
  – 9/13 8:30am ET: August CPI <– expect core CPI below consensus of +0.20% MoM
• Headline inflation will certainly see a boost from the higher oil prices, and this is a predictable outcome. This does not necessarily feed into core CPI and core PCE (Fed’s preferred measure) but will certainly catch the attention of the public and in a way, will be something the Fed has to consider. But the more important drivers of inflation, core that is, going forward is housing and used cars.
• As our pie chart below highlights, housing and auto-related (new and used cars) account for 57% of the core CPI basket. And the next two biggest weights after that are Healthcare (9%) and Education and Communication Services (8%). The latter two are not really sensitive to monetary policy, so it is really housing and autos that matter the most. And as we have written about extensively, both are set to be reducing materially core CPI over the next few months.
• It is fair for someone to say that weaker jobs and softening inflation are consistent with both a hard landing and a soft landing (our view). And the Fed study by former Fed Vice Chair Alan Blinder shows that most tightening cycles end in soft landings. What leads to a recession is a subsequent shock. In 2008 it was the GFC. In this cycle, there have been multiple shocks already:
  – Oil surge in 2022 from Russia-Ukraine war
  – Credit shock from SVB failing in March 2023
  – 27% stock market fall in 2022
• So, the equity market and economy have already endured these shocks. In fact, in early 2022, we saw two consecutive quarters of negative GDP. In a sense, if someone is expecting a recession in the near future, it means there would need to be another shock ahead. There are possible candidates:
  – resumption of student loan payments
  – UAW strike possible
  – possible US gov’t shutdown
  But these seem to be less seismic compared to prior shocks.

BOTTOM LINE: September not off to a great start, but key fundamental data points are later this week

But while equity markets are nervous, and we know that September seasonals are not great, in our view, this is also “dead space” until we get key incoming macro data points. We discussed those above. And ultimately, the key is our expectation that consensus inflation expectations is on a path to course correct lower.

• Mark Newton, Head of Technical Strategy at Fundstrat, is still watching for signs of a low in early September. And this remains his view. And the possibility that we see weakness in the first 1-2 weeks before reversing.
• This would be consistent with timing of the August CPI and PPI releases, which is next week.
• In the near term, we would want to see US yields to decline and that along with Fed fund probabilities declining are the most consequential. While rising oil is not welcome, it is certainly not the economy killer nor equity killer or even inflation creator that it was last year.
• As for sectors, we will talk about this later this week, but we still lean towards Cyclicals. Our top sectors remain:
  – Technology/FAANG
  – Industrials <– PMIs do look like they bottomed
  – Energy
• On this latter point, the latest ISM was released last Friday 9/1 and came in at 47.6, 3 consecutive months of improvement. This could be scored as a sign of a bottom. And this bodes well for industrial stocks XLI 0.12% :
  – since 1950, when PMIs <47 and improving
  – win-ratio for Industrials next 12 months is +95%
  – median gain +22%
• So this means the fundamental case for Industrials is strengthening as we move into YE.

Key incoming data September

•  9/1 8:30am ET August Jobs Report Tame
•  9/1 10am ET August ISM Manufacturing Tame
•  9/6 10am ET August ISM Services
•  9/6 2pm ET Fed releases Beige Book
•  9/8 9am 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
•  9/19 Manheim September Mid-Month Used Vehicle Value 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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