There was an onslaught of data last week, which led to gains. Should more be expected with the coming earnings season?
Monday S&P 500 0.27%| NASDAQ 1.09%
ISM Manufacturing unexpectedly slipped and remains in contractionary territory. The weaker economic data would typically signal lower rates as rate cut expectations would increase. To the contrary, 10-year treasuries rose on the day. In the face of weak economic data, the start of the quarter brought optimism towards the next three months.
Tuesday S&P 500 0.62% | NASDAQ .84%
JOLTs job openings rose more than expected to 8.14M openings. For perspective, there were 6.6M unemployed as of the May report. The strong jobs data did not deter markets, though; this may be because the Federal Reserve Board (FRB) Chair, J. Powell, spoke on the day. He indicated that progress is being made towards their inflation target. This is the ‘secret sauce’ needed to justify future rate cuts.
Wednesday S&P 500 0.51% | NASDAQ 0.88%
Initial jobless claims rose for the week to 238K from 234K; the level remains elevated, albeit from all-time lows. Factory orders unexpectedly slipped into the negative on the month. Additionally, ISM Services unexpectedly slipped into contractionary territory. This is all bad news for economic production, so why did the markets rise? Interest rates fell as this data increases the likelihood that the FRB will lower rates sooner than expected. The heightened odds are now calling for a .25% cut in September and December, according to CME FedWatch.
Thursday S&P 500 -% | NASDAQ -%
Happy Independence Day!
Friday S&P 500 0.54% | NASDAQ 0.90%
Happy Jobs Friday! The unemployment rate rose to 4.1%, Nonfarm payrolls beat expectations, and participation rose to 62.6% from 62.5%, all for June. The unemployment rate went up even though we added 206K jobs??? Participation went up so, with more people in the market, the rate can go up even as jobs are added. This is a positive signal that workers are returning to the work force. The rise on equity markets, however, was on hopes that economic weakness would be enough for an FRB rate cut.
Conclusion S&P 500 1.95% | NASDAQ 3.55%
This was a busy week for economic data, especially for a holiday shortened week. We got weaker Jobs, manufacturing, Services, and Factory orders. The weakness led to stronger markets on hopes the FRB will cut rates BEFORE a recession can materialize. The coming week starts second quarter earnings. Valuations are stretched (S&P 500 P/E: 28.94) and economic production is weak, very little should be expected from this season. This could be the start of volatility that would lead into the Autumn.
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Headlines included Omicron, Jobs, Manufacturing, and Services PMI. So, what led the charge lower and why?
Monday
The S&P 500 jumped to open the week, rising 1.32%. This was a bounce day after a strong move lower the previous Friday. The bounce is not surprising as the move lower was based on information not formerly available (Omicron). Light market trade on Friday from the holiday on Thursday exasperated the situation.
Tuesday
Selling pressures resumed on Tuesday as all the gains from Monday were reversed and then some. The S&P 500 fell 1.90% on the day. Federal Reserve Board (FRB) Chair Powell indicated that inflation was proving more resilient than anticipated while testifying on Capitol Hill. This gave markets moment for pause. This is an indication that we will likely see rate hikes (monetary tightening) quicker than anticipated.
Wednesday
Wednesday started strong as investors responded favorably to ISM Manufacturing data. That momentum quickly faded, however, as the first case of Omicron was detected in the US. The S&P 500 gave back another 1.18%.
Thursday
Another bounce came on Thursday as the markets faded Omicron concerns. Initial jobless claims continued their run at lower levels as only 222K initial claims were filed. The S&P 500 rose 1.42%.
Friday
Happy Jobs Friday! It was a mixed report. Private nonfarm employment was a hard miss, coming in at 235K when 530K were expected. The rate of unemployment fell, however to 4.2%, even as participation rose to 61.8%. Largely overlooked was the fact that ISM Services PMI rose to 69.1 for November. Services make up over 80% of our economic activity, this data carries strong meaning. For perspective, this is the highest reading dating back to the start of tracking in 1997. The pandemic low (April) was 41.8!
Conclusion
Interestingly, the jobs data released on Friday seemed bleak as a result of seasonal adjustments. In all actuality, 778K jobs were added, but, that is adjusted down in comparison to last year’s figures. Aside from a miss on wage growth (which actually signals less inflationary pressure), the jobs report was quite favorable:
- 778K jobs added
- 4.2% unemployment rate, a decrease
- 61.8% participation, an increase
- 7.8% Underemployment rate, a decrease
- 4.8% YoY Earnings increase, equal
So why the fall on markets? The FRB has a dual mandate, inflation of approximately 2% and full employment. Full employment has historically been deemed to occur at around 4%, however inflation is running hot at 5% (PCE). Investors see the job market as stable enough that the FRB will be turning their attention to inflation. This happens by the FRB taking away accommodative policies such as bond buying programs. It then moves to them tightening monetary policy by raising interest rates and selling bonds on their balance sheets. All of which signals contained economic growth expectations in the near term.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.