Stocks swooned yesterday after a non-government agency employment report gave a glowing assessment of the US job market. The report was economy-friendly but the bane of the Fed’s efforts to eliminate inflation.
Tough choices. Yesterday, I wrote a somewhat cheeky submission on how a lot of people – and I am not implying that YOU are one of those – approach consumption. If you, kind-of, feel like everything is OK, why would you alter your buying habits? Your stock portfolio, for the most part, is better off than it was last year… though that is not saying much. Things seem OK at work, though you have heard of layoffs at other companies. You aren’t worried because you also heard that there are plenty of jobs available. It’s summer in the northern hemisphere and its not quite winter in the southern hemisphere, so… why not go for that luxury, obnoxiously expensive ice cream-gelato-whatever? Also, perfect time for a vacation, no? This may not apply to you, but you understand the feeling. Maybe, it’s because last year felt so miserable with the stock and bond markets, that this year feels relatively… OK. Whatever it is, central banks around the world and the US’s Fed are rightfully worried about that.
Really, what is it going to take to get consumers to give their wallets a rest? A life-threatening pandemic with millions of deaths worldwide? Um… no, been there, done that. Ah, how about mass layoffs where everyone is unsure about whether they are going to be employed in the next few months with no prospects of any employment other than taking a lower wage. Maybe throw in a nice recession to gild the lily. Ah, that must be the magic bullet! Literally destroy all hope for future earnings prospects. That is the most well-worn and patinaed page in the Fed’s playbook, and guess what, the Fed’s threadbare playbook is opened to that very page right now. You know this, because you have been paying attention.
That being the case, you might have been concerned that yesterday, the ADP Employment Change indicator showed that a whopping (yes, whopping) new +497k jobs were added last month, more than double of what economists were expecting. What’s more, the JOLTS Job Openings number showed that there are 9.824 million job vacancies. The Bureau of Labor statistics reports that there are 6.097 million unemployed Americans, so that means that there are 1.6113 jobs for each unemployed person. Hm, seems like goods times, then, eh? Going back to the ice cream, I could almost hear the collective cringe of the FOMC members as that number came across the tape. The Fed knows what it must do to bring inflation back to normal. It will not rest until the job market shows signs of true unraveling.
So, that’s it, we should just buckle up and get ready for a catastrophic comet strike? No, there is hope. Remember inflation? You know, the reason we are even having this discussion instead of what to invest in to take advantage of the AI boom. Yes, inflation. Well, that has been easing quite a bit and the latest economic numbers support that. Last week’s PCE Deflator showed a clear slowdown in inflation. Just this morning a global indicator of food inflation, the UN FAO Food Price Index, showed another steep decline from last year. The index which tracks a basket of global food-based commodities (example cereals, sugar, cooking oil, meat, etc.), declined by -20.94% since last year. To be fair the index is still +20% above where it was prior to the pandemic, but the downward trend is notable and significant. So, shouldn’t we be celebrating that food inflation is pulling back and that there are plenty of jobs for those that want them?
This is the conundrum faced by the Fed. They will be watching this morning’s monthly employment situation which is expected to show that +230k new nonfarm jobs were added last month with a slight decline in the unemployment rate. Given yesterday’s private number, economists are whispering about a larger-than-expected increase in the former. They will also be watching for any larger-than-expected increases in average hourly earnings, a more direct driver of inflation. It is expected to have increased by +4.2% since last year. The increase should cover that splurge on the expensive ice cream… which is not likely to have been included in the UN number.
STOCKS ON THE MOVE IN THE PREMARKET
First Solar Inc (FSLR) shares are higher by +1.18% this morning after the company announced that it secured a $1 billion revolving credit facility. The crucial liquidity capital will help the only US-based, top 10, solar company to compete in the growing market. The company is set to deliver its earnings later this month. Potential average analyst target upside: +23.1%.
Paramount Global (PARA) shares are lower by -3.40% in the premarket after getting downgraded to UNDERPERFORM by Wolfe Research. That brings the company’s BUY/HOLD/SELL percentages to 23.3%/36.7%/40% respectively. The company will announce earnings in early August. Dividend yield: 1.21%. Potential average analyst target upside: +14.0%.
YESTERDAY’S MARKETS
Stocks took a drubbing yesterday after the ADP jobs number came in significantly higher than expected clearing a path for the Fed to hike rates further. Treasury yields climbed bringing the 2-year note yields to levels not seen since earlier this year, but 2007 prior to that. The S&P500 fell by -0.79%, the Dow Jones Industrial Average declined by -1.07%, the Nasdaq Composite Index slid by -0.82%, and the Russell 2000 Index traded off by -1.46%. Bonds declined and 10-year Treasury Note yields added +9 basis points to 4.03% and are higher yet this morning. Cryptos slipped by -0.23 and Bitcoin gave up -0.51%. The S&P ESG Index declined by -0.75%.
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