Week in review
- July JOLTS at 7.76M, lower than consensus of 8.10M
- U.S. August ISM manufacturing at 47.2, lower than consensus of 47.5
- Japan July wage growth softened to 3.6% y/y growth
Week ahead
- China CPI, trade balance
- U.S. CPI
- ECB rate decision
Thought of the week
The equity market selloff last week brought back slight déjà vu of the early August episode, with tech and cyclicals underperforming in a risk-off sentiment shift. It was trigged by disappointing U.S. ISM manufacturing PMI, job openings data and the Fed Beige Book revealing weak economic activity across most regional districts in August. But none of that was far out of expectations, suggesting positioning and technical factors were also at play behind the market weakness. Elsewhere in the bond market, the dis-inversion in the yield curve sent jitters as well, with the 2y/10y spread recently flipping marginally positive after 26 months of inversion. For those that see an inverted yield curve as a recession pre-cursor, a dis-inversion would then be associated with the start of a recession. However, we do not see this as an alarming sign given the weakened predictive power of the yield curve post-2008. So far, labor market data hasn’t collapsed (yet), but merely rebalanced, especially when comparing to 2019 levels. For example, job openings fell to 7.7 million, lowest in 3.5 years, but still higher than 2019 average. Vacancy to unemployed ratio has also normalized from a peak of 4.3 to around 1 now. August jobs data will be key to judge whether last week’s equity pullback should lead to a continued correction, but as of now, we maintain our base case of a soft landing.
2y/10y U.S. Treasury spread
Percent
Market data