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Monthly Economic and Investment Outlook

August 2024 Economic and Investment Outlook

United States

stock market bull statue
  • The U.S. economy generated 114K new jobs in July, well below the consensus of 175k. Job gains occurred in healthcare, construction, and transportation and warehousing. The unemployment rate rose to 4.3%, from 4.1% in June. Average hourly earnings rose 3.6% y/y vs 3.8% last month. The average workweek ticked down to 34.2 hours.
  • The July ISM manufacturing PMI index fell to 46.8% from 48.5% in June, the lowest point since November 2023. According to Strategas, the PMI has a 50% correlation with GDP and a 60% correlation with S&P 500 earnings.
  • The Employment Cost Index (ECI), which measures changes in total compensation costs, rose 4.1% y/y in Q2, down from 4.2% in Q1.
  • According to the advanced estimate released by the Bureau of Economic Analysis, real U.S Gross Domestic Product (GDP) expanded 2.8% annualized in Q2 2024, outpacing the previous quarter’s 1.4% growth, and above consensus estimates of 2.0%. The composition showed broad-based strength, with notable contributions from consumer spending, private inventory investment, and non-residential fixed investment.

    Real GDP 

     

  • June’s headline Personal Consumption Expenditure (PCE) price index ticked up from May’s, but momentum continues to cool. Headline PCE inflation fell to 2.5% y/y from 2.6% the previous month. Core PCE, ex-food and energy, remained unchanged at 2.6% y/y.


    Core PCE Inflation
    Sources: Bureau of Economic Analysis, Strifel
       

  • The U.S. housing market is showing no signs of recovery. Affordability is an issue due to both high mortgage rates and record-high home prices. Additionally, home prices have increased nearly 50% while wages have only increased 25% since 2019.

    US Avg Weekly Earning
    Source: Piper Sandler 

Global

  • July Consumer prices were higher in the eurozone as headline inflation rose to 2.6% y/y, from 2.5% y/y in June. Inflation heated up over the month in Germany, France, and Italy, the eurozone’s three largest economies. Services inflation eased only marginally to 4.0%, from 4.1% in June. Core inflation remained steady at 2.8% for a 3rd consecutive month.
  • Q2 2024 GDP growth in the eurozone was 0.3%, compared to Q1, and increased 0.6% y/y. Germany slipped back into recession. This was the 3rd quarterly GDP decline for Germany over the past six quarters.
  • Eurozone economic weakness also showed up in July’s manufacturing PMI, which registered 45.8%, the same contractionary level as in June.

    Eurozone manufacturing pmis
    Source: Oxford Ecomonics

          

  • Major central banks are moving policy rates in different directions, a reflection of uneven global growth and economic activity. In the United Kingdom, the Monetary Policy Committee (MPC) lowered the key bank rate 25 basis-points to 5%. The Fed held the fed funds target rate steady at 5.25% - 5.50%, while in a surprise move, the Bank of Japan raised its policy rate to 0.25%, which may add short-term strength to the yen.
  • China’s real GDP grew at a seasonally adjusted annual rate of 4.7% in Q2, its slowest growth rate since Q1 2023, and below the government’s economic growth target of 5.0% for 2024. The consumer sector is weak, with real retail sales growth of only 1.8% y/y in June. Consumers have been harmed by a large negative wealth effect from falling home and stock prices.

    Chinese Stock Price Indexes
                   

  • According to the National Bureau of Statistics, China’s manufacturing PMI dropped slightly to 49.4% in July, from 49.5% in June, extending its run of declines for a 3rd consecutive month. The drop signals continued weakness in the Chinese economy, even as China’s Politburo pledges more pro-growth measures to boost consumption and encourage consumer spending.
  • China’s pro-growth measures will focus on a manufacturing and technology-led growth model, which has sparked a backlash from foreign governments that worry this is already adding to its excess capacity.
  • China’s non-manufacturing PMI, which covers both service and construction activity, also dropped last month, but remained in expansion territory at 50.2%, compared to 50.5% in June.

Fixed Income

  • The Federal Reserve concluded its July Federal Open Market Committee (FOMC) meeting holding the fed funds rate steady at 5.25%-5.50%. The rate remains at its highest level since 2000, and above the long-term average of 4.4%.
  • The Fed has a dual mandate – full employment and stable prices. Unemployment is in an uptrend, with the unemployment rate rising from its cycle low of 3.4% to a recent 4.3%. CPI inflation is down from its June 2022 high of 9.1% to a recent 3.0%.
  • Fed Chairman Powell suggested the first fed fund rate cut could be “on the table” at the next FOMC meeting, scheduled for September 18th. The Fed is clearly focused on its dual mandate, as part of the post-meeting statement proclaimed, “the committee is attentive to the risks to both sides of its dual mandate.”
  • Investors are worried the Fed is behind the curve on cutting interest rates, risking a policy error. After the weak jobs report, odds of a 50 basis-point cut to the fed funds rate in September have increased significantly.

     
    Federal Funds Rate changes
          

  • July’s weak employment report has raised several important questions. Did the Federal Reserve wait too long to pivot towards easing monetary policy? Will the Fed cut the fed funds rate by 50 basis-points in September, instead of the previously expected 25 basis-point cut? Is a soft-landing off the table now and a recession imminent? How does the stronger Q2 GDP growth of 2.8% reconcile with other weaker recent economic data?
  • The Fed wants to avoid the policy mistakes of the 1970s, when fed fund rates were cut prematurely and had to be increased later when the second wave of inflation emerged.

    macrotrends graph 

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as fixed income markets digest economic data and attempt to anticipate the Fed’s next interest rate move.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.

Equity Market

  • The equity markets witnessed a significant rotation towards smaller-cap stocks in July. Weakness in the Information Technology (-2.09%) and the Communication Services (-4.01%) sectors along with expectations of potential fed fund rate cuts fueled this rotation. Real Estate (7.22%) and Utilities (6.79%) led among the large cap sectors.

          
    S&P 500 Sectors
    Source: S&P Dow Jones Indices LLC and/or its affiliates.
           

  • The S&P MidCap 400 and the S&P SmallCap 600 were up 5.81% and 10.8%, respectively, significantly outperforming the S&P 500’s return of 1.22%.
  • In early August, the Nasdaq officially entered a correction, down more than 10% from its record high reached in July.
  • According to Strategas, it may make sense to pay close attention to a fed funds rate cut for equity markets and S&P 500 earnings. On average, the market bottoms 213 days later and 23% lower after the first Fed cut in a series of rate cuts. S&P 500 operating earnings decline by roughly 10% on average in the 12 months following the first easing.



    trading days
    Strategas Securities

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold, to serve as a hedge, in a geopolitically tense global environment.
Notices & Disclosures

Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

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