Stocks closed moderately lower on Friday after monthly employment numbers came in stronger than expected. Strong employment numbers partially dashed hopes that the Fed would ease up on its rate hiking plans.
Ticket to ride? It would be a stretch to say that stocks have been doing well lately. However, it is clear that volatility has diminished somewhat and there is a growing sense of optimism that stocks may be on the mend…if not simply moving past those big downward moves from last quarter. A prime driver for recent gains in equity indices is the lowering of Fed rate-hiking expectations. Economic numbers have been unarguably coming in on the softer side, leading some investors wondering if the Fed’s aggression may push the US economy into a recession. We know this by observing the 2-year/10-year yield curve which inverted and remained so last week. That is when yields on the 2-year Treasury Note, which attempts to reflect Fed Funds in 2 years, are higher than yields on the 10-year Treasury Note, which attempts to forecast economic activity in the future. Inversions typically occur before a recession, so the hope is that the Fed will take notice and slow down its application of the economic brakes.
Prior to Friday’s employment numbers 10-year Treasury Note yields were below 3% after declining, for the most part, for several weeks prior. Those yields popped up over 3% once again after the release. Also, prior to Friday’s report, Fed Funds futures predicted an 83% chance of a +75 basis-point rate hike later this month, and that probability jumped to 95% after the report. So, what was it in Friday’s report that upset the optimists? Well, to start, the Unemployment Rate came in at 3.6%, as expected and the same as the prior month. Though it is still right above the multi-decade, record low achieved prior to the pandemic, it was still in line with economists’ expectations. Change in Nonfarm Payrolls however came in at +372k, significantly higher than estimates of +265k, but still lower than the prior month’s downwardly revised +384k gains. Under normal circumstances, that would be an unremarkable release, but now, with rate-hike tensions at a high point, investors are worried that numbers representing economic strength will give the Fed a thumbs up to go ahead and continue to hike rates at an aggressive pace.
Employment represents 50% of the Fed’s responsibility, while inflation represents the balance. The last read we had on inflation was the PCE Deflator release at the end of June, and that number came in lower than expected at +6.3% and the same as the prior month. That was positive for stocks because it may be a hint that inflation is peaking and, being the favored inflation indicator by the Fed, would portend to slower future rate hiking. Later this week we will get inflation data from a different source in Consumer Price Index and Producer Price Index. These numbers, though not preferred by the Fed, are more closely watched by markets and everyday folks. That means that any surprises in the releases could either reignite bullish optimism…or the opposite, depending on their outcomes. Also, later this week, earnings season will begin in earnest led by the big banks. Once underway, earnings will take the top spot on the market worry list as investors will not only seek information on the financial health of companies, but even more importantly, how and if inflation may be impacting them today and in future quarters. Inflation will not be the only damper of growth, however. As higher rate expectations have grown in recent months, the US Dollar has rallied strongly against other currencies. A stronger dollar makes US goods more costly to foreign buyers, and it is likely to cause a decrease in demand for US goods abroad.
Indeed, there will be many things to keep an eye on the week ahead. The Fed and inflation are still at the top of the list for the markets as a whole, while earnings will have strong impacts on individual companies and their industry peers. The next FOMC meeting is scheduled for next week… already, and we will learn a lot more on whether the Fed is on the side of the budding group of market bulls…or on the side of the now-resting bears.
FRIDAY’S MARKETS
Stocks closed slightly lower on Friday in response to stronger than expected monthly employment numbers leading some investors to believe that the Fed would not alter its prior hawkish rate hiking plans. The S&P500 Index lost -0.8%, the Dow Jones Industrial Average slipped by -0.15%, the Nasdaq Composite Index gained +0.12%, and the Russell 2000 Index gave up a scant -0.01%. Bonds pulled back and 10-year Treasury Note yields climbed by +9 basis points to 3.08%. Cryptos declined by -0.43% and Bitcoin gained +1.09%.
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