Stocks ended mixed Thursday after the yield curve between the U.S. 2-year note and 10-year bond inverted yet again. This came as investors parsed through Fed commentary suggesting a rate cut may not necessarily be the central bank’s next move.
Earlier in the session, stocks had been higher across the board as investors considered corporate earnings, digested European and domestic economic data and awaited a remarks from the head of the Federal Reserve Friday.
Here were the main moves in the markets at the end of regular equity trading.
S&P 500 ( ^GSPC ): -0.05%, or 1.48 points
Dow ( ^DJI ): +0.19%, or 49.51 points
Nasdaq ( ^IXIC ): -0.36%, or 28.82 points
10-year Treasury yield ( ^TNX ): +3.8 bps to 1.615%
Market participants this week have been waiting to hear from Fed Chair Jerome Powell, who will deliver remarks at the central bank’s annual Jackson Hole symposium Friday. Investors widely hope that Powell’s rhetoric will lay the groundwork for further rate cuts over the course of the next few months.
Comments from some Fed officials ahead of Powell’s highly anticipated remarks, however, have hampered hopes of easier monetary policy in the near-term.
Thursday morning, Federal Reserve President Patrick Harker told CNBC that he supported the Fed’s July 31 rate cut “somewhat reluctantly.”
“I didn’t think the cut was appropriate, necessarily, but I went along with it to get back to neutral,” Harker said during the Jackson Hole conference. He added “we should stay here for a while” on rates.
As of Thursday morning, markets priced in a 91.2% probability of a 25 basis point ease after the September meeting, as well as a 58.5% probability that rates would be another 25 basis points lower after the October meeting, according to CME Group. However, markets priced in a near 10% probability that benchmark borrowing costs would be left unchanged after the September meeting, with the odds rate of this outcome trending higher during Thursday’s session amid Harker’s remarks.
With the central bank having failed to reach a consensus in delivering its July rate cut, the potential for disappointment remains high.
In an interview with Yahoo Finance’s Brian Cheung at the Jackson Hole conference, Federal Reserve Bank of Kansas President Esther George said, “it’s too soon to judge how the real economy is going to be affected” by trade uncertainty, suggesting easier monetary policy may not necessarily be the Fed’s next move to help support the domestic economy in the face of geopolitical tensions.
“Cutting interest rates is not likely to resolve that uncertainty,” George said.
George was one of two dissenters from the Fed’s July 31 decision to cut rates by a quarter point. As justification for her dissent, George had said she would need to see incoming data “point to a weakening economy” before supporting easier monetary policy.
During her interview with Yahoo Finance, George characterized recent economic data from the U.S. as “mixed.”
U.S. manufacturing sector activity unexpectedly contracted in August
New data on the U.S. economy showed activity in the manufacturing sector contracted in August and reached the lowest level in nearly a decade.
The U.S. manufacturing purchasing managers’ index (PMI) fell to 49.9 in August, according to IHS Markit’s advance reading . This unexpectedly broke below the neutral level of 50, indicating negative growth. The decline was driven primarily by a “weaker contribution from new orders, which offset a stabilization in employment and fractionally faster output growth,” IHS Markit reported.
The services sector, however, remained in expansionary territory, with the PMI at 50.9 in August. This was below expectations for a reading of 52.8, however, and the month prior’s reading of 53.0.
The composite U.S. PMI of 50.9 slipped from 52.6 in July, and reached a three-month low.
“The most concerning aspect of the latest data is a slowdown in new business growth to its weakest in a decade, driven by a sharp loss of momentum across the service sector,” Tim Moore, economics associate director at IHS Markit, said in a statement . “Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting.”
But new government data on the U.S. labor market was more upbeat.
The Census Bureau reported that new unemployment claims fell more-than-expected last week, and continuing jobless claims also trended lower. The print reinforced ongoing tightness in the domestic labor market, with firms continuing to report difficulty in finding qualified workers to fill positions.
Eurozone economic growth still muted in August
Overseas, however, economic growth has largely remained stubbornly low.
The manufacturing sector in Germany, the eurozone’s largest economy, languished in contractionary territory in August for an eighth straight month, according to the IHS Markit’s advance purchasing managers’ index (PMI) released Thursday. Across both service and manufacturing sectors in the country, more companies expected output to fall over the next 12 months than rise for the first time in more than five years.
“Concerns about demand was one of several factors – alongside heightened uncertainty, weakness in the car industry and geopolitical tensions – behind a decrease in business confidence in August,” IHS Markit wrote in a statement.
Data from France’s economy, however, came in more strongly for August.
PMIs for both France’s services and manufacturing sectors outperformed against consensus expectations, with the latter sector rising out of contractionary territory and showing growth for the first time in two months. Service sector expansion still exceeded manufacturing growth, however, “reflecting the broader trend seen across the eurozone in recent months,” IHS Markit said.
Taken as a whole, the eurozone economy’s composite PMI rose to a two-month high in Thursday and outperformed slightly against consensus expectations.
The composite output PMI rose to 51.8, just over the neutral level of 50 separating contraction and expansion. The eurozone’s manufacturing PMI, however, held below 50 for a seventh consecutive month.
“The dynamics of the eurozone economy were little changed in August, with solid growth in services continuing to hold the wider economy’s head above water despite ongoing manufacturing decline,” Andrew Harker, associate director of IHS Markit, said in a statement. “While the rate of overall expansion ticked up, we’re still looking at GDP only rising by between 0.1% and 0.2%, based on the PMI data for the third quarter so far.”
Meanwhile, corporate earnings results this week have been dominated by retailers. These reports have underscored ongoing strength in consumption, the largest contributor to U.S. economic growth, as well as the growing divide between retailers whose operations have adapted to new consumer demands, and those that have fallen behind.
Nordstrom ( JWN ) beat low expectations for second-quarter earnings, as the company’s cost-cutting and merchandise control efforts helped the department store escape the underperformance reported by peer Macy’s ( M ) for the same period. Quarterly sales at Nordstrom, however, fell short of expectations, and the company cut top-and-bottom-line guidance for the full year.
L Brands ( LB ), the parent company for Victoria’s Secret and Bath & Body Works, also surpassed bottom-line expectations for the second quarter, while sales came up short. Closely watched comparative same-store sales at Victoria’s Secret fell 6% during the period, missing estimates for a decline of just 3.7%. Bath & Body Works comps rose 8% in the period, beating expectations by about 2 percentage points.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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