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Last Week on WallStreet - July 8th, 2023
Despite the mid-week holiday providing traders with only three and a half sessions, markets experienced a significant amount of volatility, leading to the Dow Jones posting its worst week since March. The majority of the turbulence came during Thursday's session, driven by a strong performance in the ISM Services index and an unexpected surge in the ADP jobs number, which is a less closely monitored indicator of employment. This unexpected jump raised concerns that Friday's Bureau of Labor Statistics report would also show a substantial increase. These two figures heightened the perceived upside risk for the Federal Reserve's interest rate hikes and while Friday's job figure came in below expectations, those concerns persisted with markets forcing stocks and bonds lower.
Payrolls Rose by 209,000 in June, Less than Expected, as Job Growth Wobbles
- Nonfarm payrolls increased 209,000 in June, below the consensus estimate for 240,000
- The unemployment rate was 3.6%, down 0.1 percentage point. However, a the jobless level including discouraged workers rose to 6.9%
- Average hourly earnings increased by 0.4% for the month and 4.4% from a year ago
- Labor force participation held steady at 62.6%
The key takeaway - Friday's employment report provided a mixed picture on the current state of the labor market. In absolute terms, over 200,000 added jobs is an historically strong monthly figure, however, it does come in under economist estimates and is a solid decline from May's number. Along with this report came several revisions for the past few months of data that substantially cut the amount of workers thought to be added over that time. While these items may show some softening, the job market as a whole remains robust as American's gain employment and wage increases. This resilience, however, does not display the degree of slowing the Federal Reserve would like to see and likely gives them ample justification for a hike at July's meeting.
US Service Sector Picks Up in June; Inflation Gradually Slowing, ISM Survey Shows
- The Institute for Supply Management's service focused index jumped to 53.9 in June from 50.3 in May
- Readings above 50 indicate growth
- Economists had predicted a rise to 51.0
- New orders for service businesses rose while prices paid for inputs fell
- The manufacturing index, however, fell further into contractionary territory, remaining under 50 for 8 consecutive months
The key takeaway - The services sector represents over two-thirds of the US economy and remains a significant source of economic strength following the pandemic. Not only does this month's reading display current growth in the sector, it also showcases an increase in demand to come, via new orders, and easing price pressures for inputs. Service sector growth, combined with consumer spending, housing starts and employment data, point to an economy that is not yet yielding to the Federal Reserve's pressure. That could change given deterioration in a handful of forward looking indicators and as the Fed takes action to pump the brakes further.
Fed Sees More Rate Hikes Ahead, but at a Slower Pace, Meeting Minutes Show
- Fed officials at their June meeting decided to hold off on raising interest rates, opting for a pause to assess the impact of 10 previous hikes
- Minutes released Wednesday indicated disagreement among members, with some saying that rates should go higher as inflation remains elevated
- All but two of the 18 participants expected that at least one hike would be appropriate this year, and 12 expected two or more
The key takeaway - Minutes from the FOMC meeting in June have provided insight into the central bank's ultimately unanimous decision to pause interest rate hikes. Peering behind the curtain of the headline decision, we see that several members of the committee were in favor of additional hawkish action at the June meeting. That sentiment can be understood as recent economic data has not deteriorated to the degree needed to meaningfully slow down inflation. After digesting the minutes and other data released this week, investors have priced in a near certain chance of a hike to come in July.
From the Waterloo Watercooler
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