Holiday weekend grants markets much-needed breather

This week’s Labor Day holiday, along with the holiday closure of China markets last week, helped ease market volatility. Risk remains a key factor for markets, especially given the following: 1) China policy tools in the face of a falling domestic equity market and a slowing economy, and 2) uncertainty around Federal Reserve lift-off from their zero interest rate policy. The August employment report, released last week, failed to make clear the likely Fed action.

Nonfarm payrolls grew by 173,000 jobs and prior months were revised higher by 44,000 jobs. Average hourly earnings rose 0.3% and the unemployment rate fell to 5.1%. On balance, the data was modestly supportive of the Fed increasing interest rates. However, market volatility is the likely swing factor for the September 16–17 Federal Open Market Committee (FOMC) meeting, and right now we would put the odds of an interest rate increase at just less than a coin flip.

Market attention remains focused on volatility in China and the potential for contagion from slowing economic activity in China to the rest of the world. Last week, purchasing manager data pointed to continued slowing in manufacturing activity in China and much of the surrounding region, including Taiwan, South Korea, Malaysia, and Indonesia.

In contrast, activity in Europe remained solid, with good growth across Italy, Spain, and Germany. Services were stronger across the world, with solid growth in China, Europe, Japan, and India. The strength in services appears to be balancing out recent softer data in manufacturing. Russia and Brazil remain in contraction while their economies suffer through the collapse in oil prices. It appears there is little contagion at this time from slower China manufacturing. The stronger services data from China, in particular, likely indicates the rebalancing of the economy toward consumption may be well under way.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

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