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Friday Five: Fed's Hand Won't Be Forced

August's job report was strong enough to keep a September rate hike on the table, but not so strong to ensure it. Plus, market finds a sell-off excuse in China, automaker opportunities, and more.

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Jason Stipp: I'm Jason Stipp for Morningstar. Welcome to The Friday Five, Morningstar's take on five stories in the market this week. Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: At 173,000 jobs added in August, the employment report was not the disaster that past August reports have been. What's your first read on that?

Glaser: It wasn't a disaster at all. It was below that 220,000 jobs that analysts were expecting but was right in line with what Morningstar's Bob Johnson was expecting at 175,000. You look at the upward revisions to previous months, and you look at the decline in the unemployment rate, and overall, it was a decent report.

The reason that we're especially interested in this report was that it's the last piece of information that the Fed is going to get before their September meeting next week. And the question is, "Is the Fed going to raise rates?"

I don't think we got a lot of new information here. It's strong enough that if they wanted to raise rates in September, I think they still can, but it's not so strong that it's going to force their hand. So I think next week, is still going to be anyone's guess if they're going to raise rates or not.

Stipp: The markets were down after the jobs report was announced on Friday. Earlier in the week, though, it seemed like China was again troubling the markets. What was it this time?

Glaser: Manufacturing data showed that some of the large companies are moving into contractionary territory. This is another piece of data that, again, shouldn't be a huge surprise. It didn't come out of the blue that the Chinese manufacturing sector was slowing. These indexes have been trending down for quite some time now.


It seemed like the market was just looking for another excuse to sell off, and it was using China as the excuse to do that. I think we just need to look back and see that, yes, China is an important part of the global economy. It's going to have major impacts on emerging markets, on commodities, on earnings for a lot of companies. But it's not the be-all and end-all of the global economy, and there are still a lot of other things going on and other factors that investors need to keep in mind.

I think the market is focused on China but is also thinking about the Fed and is thinking about the fact that valuations are pretty high right now and have been high. We haven't had a sell-off in a while. Investors are kind of using this as an excuse to maybe have some selling.

I don't think this volatility is going to go away anytime soon, and investors should be prepared to potentially take advantage of it. We haven't seen incredible pockets of opportunity opening up yet, but just little bits here and there. I think if you have a watch-list of firms that you are interested in buying, and if you do see a pullback, you can take advantage of that.

Stipp: The U.S. Federal Reserve was not the only central bank in the news this week. Mario Draghi also spoke, and as his meetings often do, moved the market. What did he have to say?

Glaser: In his press conference, he talked about some of the problems that are potentially facing the eurozone, China being one of them, with the way that it could potentially be hurting exports.

European growth had looked a little bit better. It slowed a little bit. They're not expecting a huge bounce-back now. They think that the slow growth is going to continue.

And the real news was that he talked about the fact that the ECB is going to both fully complete its current bond-buying program, its current stimulus program, and also would be open to extending it if the conditions warranted. They're not quite at the point where they're going to say what the specifics of that would look like, or how long, or how big any kind of future stimulus program would be. But they wanted to make it clear the ECB will be there to act if they need to, if the eurozone economy doesn't start to look much better.

They're still very much in an easing mode, which is in contrast to the Fed, which is obviously getting ready, if not now, a little bit later, to tighten. I think markets took that as somewhat of a soothing sign that there's still going be some easy money, at least in the eurozone.

Stipp: Here in the U.S., auto sales looked strong in August. What was driving the result?

Glaser: This was a surprisingly strong August, considering that the Labor Day sales last year were in August; this year, they're in September. There was an expectation that sales were not going to look quite as strong.

But if you look at it on a seasonally adjusted rate, it was around 17.8 million. That's up from 17.5 million last year, even if the actual raw sales were down a little bit because of the Labor Day issue.

A lot of this is just that the average fleet, the average car on the road, continues to get older, and that drives new sales. Gas is cheap; that's driving sales of trucks and SUVs. And credit is relatively easy. It's easy to get financing for a car. That obviously helps drive sales as well.

You look at individual results. Ford had a really strong month with a lot of their new trucks that are on the lot. GM sales were down a little bit, but a lot of that was because they have really tried to cut back on fleet sales. They're direct retail sales looked pretty good. And Fiat Chrysler was up as well.

We think all three of these names are actually in 4-star territory right now. They're no-moat; they are higher uncertainty. They might not be appropriate for everyone. But we've talked about them for quite a long time; they really do look quite of a bit undervalued. We think there's still a long way to go in terms of a growth in auto sales in the United States.

Stipp: In deal news this week, General Mills announced that it's selling the iconic Green Giant Brand. What was the reasoning for that sale?

Glaser: They didn't think that it fit in their portfolio anymore. Frozen vegetables are just not a growth category by any stretch of the imagination, as consumers switch to a preference toward fresh vegetables. They were able to get $765 million for Green Giant, and another brand, selling it to BNG, which is a decent multiple for these businesses given the growth prospects.

They want to take this money and use it to maybe do some share buybacks, to pay down some debt. Erin Lash, our analyst on General Mills, thinks that they're also probably trying to free up some space to invest in natural and organics, areas that are growing a little bit more, and improving their distribution in some emerging markets.

She doesn't think that General Mills is particularly undervalued right now; it looks about fairly valued. They still need to work on improving their innovation. A move like this helps set the stage for that, but they really need to execute on what they're going to do with the proceeds from this. But overall, this seems like a decent move for the firm.

Stipp: Great insights on another busy week in the market, Jeremy. Thanks for joining me.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.