The headline unemployment rate fell to 3.5%, while most other indications showed a slowdown of the labour market. There have been many indications that have reached their lowest points since early 2021. These include a decrease in the number of job opportunities (to 8.8 million), a decrease in the number of small firms expecting to employ (17%), and a decrease in the number of persons leaving their jobs (3.5 million in July). Meanwhile, consumer confidence spiked in the summer, but was quickly wiped by increasing borrowing prices, marking the steepest fall in two years.
The most economically vulnerable small-cap companies were the worst performers while U.S. equities had a tiny decline but remained positive for Q3 through August. Businesses and individuals alike are starting to feel the effects of banks' stricter lending rules and higher interest rates. As a result, investors are apprehensive of another interest rate rise by the Fed, which, considering recent remarks and worse economic statistics, could not occur in September.
Since many countries are dealing with the same issues, such as inflation, international stocks have mostly followed the lead of U.S. equity markets. Amidst deflation, slower growth, high levels of consumer and company debt, and structural young unemployment, China stands out with a 9.0% capital outflow. On the other hand, the near- and friend-shoring trend that we've been talking about for a while seems to be helping countries like Mexico and India right now.
Rates of interest have been rising again since May. In anticipation of the Federal Reserve having to maintain its target interest rate high for an extended period, the yield on the U.S. 10-Year Treasury note is approaching the peak reached late last year (4.2%). Bonds with shorter maturities and some corporate bonds with higher yields did well against that background, while municipal bonds that were allegedly overpriced came back down to earth to some extent.
In August, the majority of real assets, similar to the stock markets, had poor or negative returns. Despite a world where economies are weakening, commodities were the relative performers that performed the best: As a result of reduced crude oil supply, the energy component rose 2.4%. As a result of the increase in interest rates, Treasury Inflation Protected Securities (TIPS) declined within the fixed-income asset class.
Since both conventional equities and bonds ended August with losses, hedge funds fared among the best. For the most part of August, the market followed absolute return-oriented strategies (+0.7%), which tend to do better in more volatile circumstances. A notable exception was market directional hedge funds, which lost 0.5% of their value. Despite this, these funds have outperformed other alternative strategies so far in 2023, thanks to the robust performance of global equities.
August saw little change in the tug-of-war between the forces of expansion and contraction in the economy and financial markets, as we have discussed in our previous commentary.
The data as we enter the autumn paint a less rosy picture, despite consumer spending showing a robust increase in July over June (+0.8%). This is due to a number of factors, such as a cooling labor market and wage growth, which have been constantly declining from the multi-decade peak hit in June 2022, and a rapid deterioration in consumer confidence.
On the other hand, the Core PCE, the favored inflation indicator of the Fed, has grown over the last two months at its weakest rate since 2020. Inflation in the United States would reach 2.4% at that rate, which is close to the Federal Reserve's objective of 2% and a relief after the much higher inflation seen in 2022 and early 2023. However, a weaker economy is frequently the cost of reduced core inflation.
The expansion of the service sector has more than compensated for the slowdown in manufacturing, thus far preventing a decline in economic activity in the United States. The widespread belief that a severe recession would be averted undoubtedly helped the financial markets leading up to August. However, investors are still worried about the extent to which the economy would contract, as the cost of borrowing for companies and consumers is a major factor in GDP growth.