The summer came to a relatively quiet end, with stocks rising in the final weeks of August, bond yields relatively little changed, and energy prices rebounding strongly off the July lows. From an economic standpoint, growth continues to moderate as inflation creeps higher, but so far this dynamic hasn’t impacted equity markets in a material way, largely due to the continued easy money policies of global central banks. One of the reasons economic growth is slowing is a continued shortage of workers in the domestic economy, which has hampered output in many key industries. Job openings in the U.S. economy remain at record highs, as employers have been unable to fill roles, particularly at small businesses, as shown in the figure below.
From a seasonality perspective, September and October generally see higher levels of equity market volatility, and so far that has been the case, as the first couple of weeks of September there has been a modest pullback in stocks. In Asia, the moves have been more pronounced, with mainland Chinese equities continuing to struggle, as regulators crack down on a number of sectors, most recently gaming, as the CCP looks to exert more influence over the Chinese economy. So far, the spillover to western stock markets has been limited, but with the Chinese real estate market beginning to wobble, there could be a possible transmission mechanism to western markets if major companies like Evergrande are allowed to fail. So far though, Chinese policymakers have shown little appetite for the type of volatility this event could create, but none the less, the events in China continue to warrant careful monitoring.
In terms of Central Bank policy, all eyes will be on the Fed in mid-September, as investors look to see whether policymakers will begin tapering their asset-purchase programs, which have provided much of the liquidity boost that has sustained markets for the past 18-months. The decision won’t be an easy one, because on one hand, inflation is rising rapidly, but on the other hand, growth is also slowing sharply, and the baton has not yet been passed to another stimulus package, which remains caught in the chambers of commerce, as Democrats and Republicans wrangle over how to pay for it, and whether to raise the debt ceiling, and by how much. With all that is at stake, we wouldn’t be surprised to see some brinksmanship over the debt limit come October, which could be another potential source of uncertainty during an already seasonally volatile period.
All in all, Central Bank liquidity remains ample as the Fed slowly tapers, and another stimulus package will eventually get passed, both of which should help to provide a buffer against any near-term (4-12 week) volatility caused by spillover from China, or political wrangling over the debt ceiling come October.
Source: Bloomberg, National Federation of Independent Business