Last Week on Wall Street

Last Week on WallStreet - June 3rd, 2023

S&P 500: 1.83% DOW: -2.02% NASDAQ: 2.04% 10-YR: 3.69%

What Happened?

In a shortened week following Memorial Day Weekend, a wave of optimism swept through the markets, leading to a broad market rally and marking the NASDAQ's sixth consecutive week of gains. At the beginning of the week, negotiations between the White House and GOP leadership successfully resulted in a deal to raise the debt ceiling, reducing uncertainty and instilling confidence in the equity markets. The terms of the agreement have now passed both houses of Congress and await the president's signature. However, the main driver of this week's performance was Friday's surprising employment report, which showcased remarkable job gains without a corresponding significant increase in wages. This report ignited an exhilarating rally, with the Dow Jones surging by 2.1% on that day.

Beneath the surface, divergence in positive and negative performance over the last few weeks subsided with all 11 sectors of the S&P 500 gaining. Real Estate (4.3%) surprised to the upside posting solid returns for the week along with the recent high flyers Discretionary (5.7%) and Technology (4.2%). Defensive segments of the market, such as Utilities (0.8%) and Staples (0.6%), continue to underperform their economically sensitive counterparts.


Payrolls Rose 339,000 in May, Much Better Than Expected in Resilient Labor Market

  • Payrolls in the public and private sectors increased by 339,000 for the month, better than the 190,000 Dow Jones estimate
  • The unemployment rate rose to 3.7% in May against the estimate for 3.5%, even though the labor force participation rate was unchanged
  • Average hourly earnings, a key inflation indicator, rose 0.3% for the month to 4.3% YoY
  • Professional and business services led job creation for the month with a net 64,000 new hires.

The key takeaway - Despite the visibility of layoffs announced by some of the largest companies in the world, the US labor market remains incredibly resilient as evidenced in the shocking beat on expectations in this report. The better-than-expected news from the Bureau of Labor Statistics will cool fears of imminent economic deterioration as job gains fuel consumer spending and therefore the economy. The same dynamic also complicates the Fed's policy rate decision due to their need to ease the brakes on the economy to moderate inflation. However, the in-line figure for average hourly earnings could mean that the inflationary pressure of the strong labor market is easing.


Fed's Beige Book Points to Cooler Economy, But Maybe Not Cool Enough to Tame Inflation

  • The Fed’s regular survey of the economy, known as the Beige Book, indicated the U.S. is still in decent shape
  • The U.S. appears to be expanding in the 1% to 2% range
  • The Fed did not find much sign of trouble in the financial system in the wake of a spate of regional bank failures
  • Americans continue to spend especially on services
  • Inflation slowed a bit in the spring, but strong demand is keeping prices high

The key takeaway - In summary, the Federal Reserve's Beige Book provides their overall perspective on the current state of the economy by weaving together economic data. The central bank's assessment reveals several key observations: persistent high inflation, a robust labor market, resilient consumer spending, and steady economic growth. While the banking system appears stable without signs of further deterioration or contagion, there has been a decline in lending accompanied by an increase in defaults. As we approach the June FOMC meeting, there is a divergence in expectations regarding the rate decision, with probabilities assigned to a rate hike or a pause in rate adjustments. Some Fed officials have entertained the possibility of a "skip" in the hiking cycle by maintaining rates now before elevating them again this summer.


Jeffry Bartash - MarketWatch

US Manufacturing Slumps Further in May; Employment Picks Up

  • The Institute for Supply Management (ISM) said its manufacturing PMI fell to 46.9 last month from 47.1 in April
  • It was the seventh straight month that the PMI stayed below the 50 threshold, which indicates contraction
  • The ISM survey's forward-looking new orders sub-index dropped to 42.6
  • The survey's gauge of factory employment increased to 51.4 from 50.2

The key takeaway - The manufacturing sector (11% of the US economy) continues dragging on the economy's steady rate of expansion with over half a year of consecutive contraction readings. Post-Covid, consumers made a drastic shift from spending on goods towards services. The Fed's hiking cycle to fight inflation hasn't helped either as goods are typically bought on credit. The very disappointing new orders reading, which indicates demand in the goods pipeline, means it may get worse before it gets better.


From the Waterloo Watercooler

Jamie Dimon hinted that he might want to run for office after he finishes his run as JPMorgan’s CEO

Twitter is worth one-third of the $44 billion Elon Musk paid for the company, according to Fidelity

Goldman Sachs is reportedly considering its third round of layoffs in less than a year as Wall Street dealmaking continues its slump

State Farm has stopped selling new home insurance policies in California because of the financial toll of paying out fire damage claims