Stock futures indicate a negative open to today’s trading. Early this morning, the U.S. Bureau of Labor Statistics figures showed that the domestic labor market is softening under the mounting impact of higher interest rates on the economy. For the month of June, nonfarm payrolls rose 209,000, compared to economists’ consensus estimate of 240,000 and the revised May increase of 306,000. Unemployment came in at a modest 3.6%, versus an expected 3.6% and the prior-month reading of 3.7%. Hourly wages advanced a quite solid 0.4% on a monthly basis and 4.4%, year on year. Worker pay growth has been trending about flat, showing that, thus far, an upward wage-price spiral has been avoided. The labor participation rate has stayed just above the 62% mark. This afternoon, Chicago Federal Reserve President Austan Goolsbee will participate in a televised interview, providing his views on the economy and central bank rate policy.
Through Wednesday’s close, in this holiday-shortened week, stocks essentially treaded water, trading in a relatively narrow range. On Monday, the Institute for Supply Management’s June reading on the manufacturing sector came in short of Wall Street’s expectations. Also, at mid-week, it was reported that May factory order growth held steady, countering a more positive outlook from the experts. Most visibly, share prices dropped during Thursday’s trading session, on the news of a stronger-than-expected June jobs report from Automatic Data Processing. In modest contrast to this report, jobless claims for the week ended July 1st ticked higher and job openings in May dipped below 10 million. New services data showed continued expansion at a level greater than what was widely anticipated. Hawkish interest-rate policy comments on the part of Fed officials added to investors’ dour mood. The major stock market indexes look to finish this week with slight losses.
Year to date, the market indexes are still holding on to positive performances. As of Thursday’s close, the tech-heavy NASDAQ was up about 31%, while the broader Standard & Poor’s 500 and the blue-chip Dow Jones Industrial Average had gained more than 15% and 2%, respectively.
There’s a good deal of uncertainty as to where markets are headed for the remainder of 2023. Up to now, inflation has been gradually slowing, consumer spending has proved healthy, and wage growth has trended modestly upward. More people on Wall Street seem to believe that the Fed can execute a soft landing for the economy, or at least avoid a harsh recession. Even so, it’s not clear whether the manufacturing sector will trend toward the service sector’s better performance or if services, like goods production, will start to contract. Recent levels of consumer optimism suggest the former scenario will prove to be true.
The Federal Reserve, given still-high inflation, appears intent on lifting short-term interest rates two or more times before yearend, starting this month. Such hikes would probably be one-quarter of a percentage point in magnitude, adding 50 basis points to the current Federal Funds range of 5.00%-5.25%. Yesterday, the rate on two-year Treasury notes rose above 5%, while the rate on 10-year Treasurys moved above 4%. Higher rates may place renewed pressure on the banking sector. Greater caution in lending money is a brake on economic growth. In light of the inverted short- and long-term bond rates, a majority of economists expect a recession to occur within the next 12 months.
Year-to-year inflation rate comparisons do look to be easier in the second half of this year, so the Fed may, at least, not be more aggressive than it is now guiding. Rates on Treasurys and money market accounts are competitive, versus potential returns on equities. That said, investors can still be in the stock market, focusing on financially strong industry leaders, including those in the tech and industrial sectors, while maintaining meaningful portfolio positions in bonds and high-interest-bearing accounts. - David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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