Day: August 1, 2024

Following a largely anticipated statement from the Federal Open Market Committee (FOMC) on Wednesday, the market focus has now shifted to the upcoming employment report due on Friday. Economists and analysts largely expect the report to provide signs that economic conditions are conducive to a rate cut in September.

Goldman Sachs economists estimate that nonfarm payrolls rose by 165,000 in July, below the consensus of 175,000 and the three-month average of 177,000. They also estimate a 125,000 increase in private payrolls, compared to the consensus of 148,000.

“While an influx of labor supply at the start of summer typically leads to an acceleration in seasonally-adjusted job growth when the labor market is tight, alternative measures of job growth indicate a pace of job creation below the recent payrolls trend, and we assume a 15k drag from Hurricane Beryl,” they said in a note.

Hurricane Beryl, which caused power outages for over 2 million Texans, significantly impacted employment in the state. Goldman noted its past analyses have shown that major hurricanes typically reduce payroll growth by around 25,000 on average, although the effects vary depending on the severity and timing of the storm.

In fairness, the hurricane had only a modest impact on this week’s ADP employment report, with employment growth in the Texas region about 10,000 below its average pace from the first half of the year.

For the unemployment rate, Goldman Sachs economists expect it to remain unchanged at 4.1%, in line with consensus.

The Wall Street firm pointed out two-sided risks to this forecast. Continued, though slowing, above-trend immigration could increase the unemployment rate, while a catch-up of household employment towards nonfarm payrolls, after a period of underperformance, could decrease it.

Economists also estimate that average hourly earnings rose 0.3% month-over-month, which would reduce the year-over-year rate by two-tenths to 3.7%, consistent with consensus and last month’s increase.

“This month’s calendar configuration should weigh on average hourly earnings, but the impact of Hurricane Beryl could boost them, as reported hours typically fall more sharply than earnings during severe weather events,” they noted.

The recent market rally, driven by optimism around AI and potential rate cuts, reaffirms UBS’s positive outlook on the technology sector, the bank said in a note Thursday.

UBS analysts highlight that despite a mid-July market pullback, the technology sector is buoyed by strong AI capital expenditure and demand.

“Despite the market pullback in mid-July, and without taking any single-name views, Wednesday’s rally underscores our positive outlook on the technology sector amid strong AI capex and demand,” wrote the bank.

They comment that S&P 500 companies are on track to achieve a 10-12% profit growth for the second quarter, with 60% of companies beating sales estimates and 75% surpassing earnings estimates, aligning with historical averages.

Furthermore, the bank’s analysts observe that guidance for the third quarter from U.S. companies remains consistent with normal seasonal patterns.

The recent Federal Reserve meeting also supports the view that rate cuts are imminent. Chair Powell’s comments indicate that the Fed anticipates a soft landing for the U.S. economy, aligning with UBS’s base case.

Powell also mentioned the Fed’s increasing attentiveness to job market risks from prolonged high rates, though current evidence suggests only a gradual cooling.

UBS maintains a favorable outlook for U.S. equities, advising investors to maintain full allocation to the U.S. market. They emphasize the importance of adhering to long-term investment plans through volatile periods to avoid missing rebounds.

UBS expects the S&P 500 to recover and end the year higher at 5,900 compared to the current 5,522.

In terms of investment strategy, UBS suggests seizing opportunities in AI, particularly in the enabling layer of the AI value chain and vertically integrated mega-caps.

They also recommend seeking quality growth stocks, which have shown consistent earnings growth and reinvestment due to competitive advantages and structural drivers.

Additionally, with anticipated rate cuts, UBS sees significant opportunities in the fixed income market, particularly in high-quality corporate and government bonds, expecting price appreciation as markets anticipate a deeper rate-cutting cycle.