S&P Global — 12 August 2024
Daily Update: August 12, 2024
Playing the Blame Game as Stocks Swoon
By Nathan Hunt
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As stocks fell over the last two weeks, many market observers blamed the inaction of the Federal Reserve, saying its decision to hold off on interest rate cuts before its September meeting increased the likelihood of a “hard landing.” Critics of the Fed point to weaker payroll growth in July and higher unemployment as evidence that recession is imminent. They believe that fear of a recession led to the sell-off in equities. The logic of this position is that higher unemployment will lead to lower demand, which, in turn, will lead to further unemployment.
"Rising unemployment among less-educated workers can kick off the downward spiral that leads to a recession because these workers often have less savings to cushion a prolonged period of time looking for work," said Luke Pardue, policy director at the Aspen Institute’s Economic Strategy Group. "Their time spent without a job then translates much more directly into reduced spending compared to when a worker with higher education, and, on average, greater savings, is out of work."
Not everyone agrees that Fed inaction caused the stock market rout of the last two weeks. "If US stocks were selling off because of the US economy, a rate cut from the Fed would be the perfect remedy," said Bret Kenwell, a US investment and options analyst at eToro. "However, other market forces are driving the recent spike in volatility, which may make an emergency rate cut less effective."
Ultimately, the “blame the Fed” theory requires the US economy to be in bad shape due to higher interest rates. The unemployment rate did climb to 4.3% in July, from 4.1% in June. However, higher unemployment would be evidence of the success of the Fed’s attempts to control inflation through higher interest rates. For the last few months, US inflation has been trending toward the Fed’s 2% target. The US economy has also been experiencing strong growth. According to S&P Global Market Intelligence, July Purchasing Managers’ Index surveys are indicative of the economy continuing to grow at an annualized 2.2% pace.
In addition, there is some evidence that unemployment is climbing because more people are joining the workforce, rather than growing because people are losing their jobs. The US civilian labor force, Americans either employed or looking for work, grew to a record high of 168.4 million in July.
There is considerable variability in the US unemployment rate depending on education. For Americans with a bachelor’s degree or higher, the unemployment rate was 2.3% in July. For Americans without a high school diploma, the rate was 6.7%. While a rise in unemployment has negative impacts on consumer spending and economic growth at any education level, middle- and upper-income households tend to spend more on goods and services. A sell-off in equities attributed to rising joblessness when the unemployment rate stands at 2.3% for the highest-spending consumers appears faintly illogical.
"We continue to believe that the Fed is also looking at holistic normalization, not simply getting rates right for the equity markets," said Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions. "As a result, issues such as the long-term inflationary expectations, the structure of the labor force and unemployment, and preserving real return for savers are likely to play a role in their thinking. The implications of that are that equity markets may not get the short-term salve they want."
Today is Monday, August 12, 2024, and here is today’s essential intelligence.
Sustainability Insights: Evolving Political Priorities Could Affect Energy Transition
Political priorities have been evolving, particularly since 2022. Due to the sharp increase in geopolitical risks and changing spending priorities, S&P Global Ratings has observed that many countries have gradually shifted their energy transition priorities. This, in turn, could alter the balance of the energy trilemma's of energy security, affordability and sustainability priorities
—Read the article from S&P Global Ratings
Lowest-Paid Workers Hit Hardest As Unemployment Climbs To Multiyear High
US unemployment rose to its highest level in nearly three years in July, and joblessness is now beginning to sharply impact Americans with less formal education and lower wages. The overall unemployment rate jumped to 4.3% in July, up from 4.1% in June. It marked the fourth straight monthly increase and a high from the most recent low of 3.4% in April 2023. The domestic labor market is starting to weaken due in part to the Federal Reserve's efforts to fight inflation with the highest interest rates in about 20 years. Rising unemployment and falling wage growth are boosting the odds of a looming recession.
—Read the article from S&P Global Market Intelligence
Fees And Fortunes
One of the potential advantages of indexing is its typically lower cost relative to active management. Investors have benefited substantially by saving on fees. And as indexing has expanded across asset classes, these rewards have compounded, especially in fixed income, where fees can prove more influential..
—Read the article from S&P Dow Jones Indices
Non-G7 Tankers Carry 10% Less Russian Crude In July Amid Sanctions
Russia's crude shipments by tankers operating outside of the G7's price cap fell by over 10% in July, with renewed pressure from Western sanctions and the country cutting supplies to overseas buyers. Data from S&P Global Commodities at Sea and Maritime Intelligence Risk Suite suggested 2.64 million b/d were lifted last month by tankers not flagged, owned or operated by companies based in the G7, the EU, Australia, Switzerland and Norway, and not insured by Western protection and indemnity clubs, compared with 2.94 million b/d in June.
—Read the article from S&P Global Commodity Insights
Listen: Venezuela’s Oil Future Is Up For Grabs In Election Contest
The future of Venezuela's oil industry is in the crosshairs of a political battle. Current president Nicolás Maduro is fighting to maintain power following a contested July 28 election, and protests have caused gasoline shortages in the country, where supply is already limited by low refinery run rates. While crude production has held up, Venezuela's exports have fallen, and it is possible the US will impose tougher sanctions on the country if Maduro clings to power, reducing the likelihood of further upstream and downstream investment.
—Read the article from S&P Global Commodity Insights
A Global IT Outage Highlights The Paradox Of Success In IT, OT And Cybersecurity
A recent widespread outage, precipitated by CrowdStrike Holdings Inc. pushing a faulty content update to Windows hosts, affected IT and operational technology (OT) systems around the world. Although details of the causes are still unfolding, CrowdStrike issued a statement regarding the involvement of its products, saying that "there was an issue with a Falcon content update for Windows Hosts." Not all organizations were equally affected, and some were substantially impaired, with operational impacts including hundreds of airline flight cancellations and other downstream effects in the wake of this incident.
—Read the article from S&P Global Market Intelligence
Interact New York 2024 (October 15-16, 2024)
Join us on 15-16 October for Interact, our flagship software and solutions conference for public and private markets, in New York. Interact provides a unique opportunity to hear experts from across S&P Global and the wider industry, while networking with peers from the investment management, corporate, banking and broader financial community.
—Register for the in-person event from S&P Global Market Intelligence