A combination of profit-taking and concerns about higher inflation, interest rates and tariffs pushed stocks lower for the week.
NASDAQ dropped 2.6%, its worst week since March, while the S&P 500 lost 1.0%, its biggest weekly decline in more than two months. Both indexes were lower most of the week after hitting new record highs the prior week. The Dow had been headed for a weekly increase but Friday’s 0.3% loss pushed it into the red, down 0.2% for the week. Most other stock indexes were also negative. On Friday President Trump threatened China with a new round of tariffs, which knocked down stock prices.
Foreign stocks were also sharply lower for the week. In Europe, the Stoxx Europe 600 dropped 2.2% and Germany’s DAX index fell 4.1%, their biggest weekly declines since March. On Friday the European Union said euro zone GDP slipped slightly in the second quarter to an annual rate of 1.5%, down from the first quarter’s 1.6% pace. By comparison, the U.S. economy grew by 4.2% in Q2. In Asia, Hong Kong’s Hang Seng index was the biggest loser, falling 3.3%; the index is down nearly 10% so far this year, although that’s better than the Shanghai composite index’s 18.3% drop following last week’s 0.8% decline. Japan’s Nikkei 225 lost 2.4% on the week.
Friday’s U.S. employment report for August came in better than expected in terms of job creation but raised concerns about rising inflation, which could force the Federal Reserve to be more aggressive about raising interest rates. The Labor Department said 201,000 jobs were created last month, up from July’s downwardly revised total of 147,000 and slightly better than forecasts. The unemployment rate held steady at 3.9% while the labor participation rate fell to 62.7%. Average hourly earnings rose a higher-than-expected 0.4% for the month, the biggest increase since December, while the year-on-year increase rose to 2.9%, the most since 2009. While that’s certainly good news for workers, it raises concerns about higher inflation and interest rates. Indeed, Treasury bond yields were higher after the report was released. The benchmark 10-year Treasury note closed Friday at 2.94%, up eight basis points on the week and its highest level in over a month, while the two-year note hit 2.70%, up five bps and its highest level in more than 10 years.
Besides the jobs report, several other important U.S. economic indicators were released last week. The Institute for Supply Management’s widely-followed purchasing managers’ indexes both rebounded strongly last month after falling slightly in July. The manufacturing index jumped more than three points to 61.3, its highest level since May 2004. The new orders component rose nearly five points to 65.1. The nonmanufacturing barometer, which tracks most of the economy, rose nearly three points to 58.5. Elsewhere, factory orders fell 0.8% in July and construction spending rose 0.1%.
Reports/dates/facts/links worth paying attention to over the next week:
1. September 12: Producer price index for August; Federal Reserve Beige Book.
2. September 13: Weekly unemployment claims; consumer price index for August.
3. September 14: Retail sales for August; industrial production for August; University of Michigan consumer sentiment index for September, first reading.