There wasn’t much change in the major indices yesterday as market participants ingested the latest plate of policy remarks from Fed Chair Powell, which tasted a lot like prior servings.
Briefly, he said more tightening will likely be needed because of the strength of the labor market, that one shouldn’t take rate hikes at consecutive meetings off the table, and that he thinks core inflation won’t get back to the Fed’s 2.0% target rate until 2025.
The fed funds futures market didn’t react much at all to Mr. Powell’s remarks, signifying that it still doesn’t believe the Fed is going to raise rates more than once before the end of the year.
It will be interesting to see today if that perspective changes at all knowing that there has been a stream of some good economic news that has triggered a spike in Treasury yields and has taken some steam out of the equity futures market.
Currently, the S&P 500 futures, which had been up 17 points, are up four points and are trading 0.1% above fair value, the Nasdaq 100 futures, which had been up 70 points, are up three points and are trading in-line with fair value, and the Dow Jones Industrial Average futures, which had been up 100 points, are up 45 points and are trading 0.1% above fair value.
The third estimate for Q1 GDP saw a strikingly large, upward revision to 2.0% from 1.3% (Briefing.com consensus 1.3%), as consumer spending proved to be stronger than thought, while the GDP Deflator was revised down to 4.1% from 4.2% (Briefing.com consensus 4.2%).
Granted this is a backward-looking report, yet the key takeaway is that it underscores how the strength of the labor market fueled consumer spending in the first quarter and helped forestall any recession-like trajectory in the U.S. economy.
A more current view of the labor market has reinforced that perspective.
Initial jobless claims for the week ending June 24 decreased by 26,000 to 239,000 (Briefing.com consensus 266,000) while continuing jobless claims for the week ending June 17 decreased by 19,000 to 1.742 million.
In the recessions seen since 1980, initial jobless claims have averaged north of 375,000, so the key takeaway from today’s report is that the labor market continues to be resilient, which is a good portent for the economy.
The Treasury market looks to be less enamored of this favorable view. The 2-yr note yield is up 16 basis points to 4.88% and the 10-yr note yield is up nine basis points to 3.80%.
Separately, all 23 banks passed the Fed’s annual stress test and their stocks are taking advantage of the passing grade. The SPDR S&P Bank ETF (KBE) is up 1.5% in what one could reasonably call a relief trade. Micron (MU), meanwhile, is up 1.5% after reporting better-than-expected fiscal Q3 results and indicating that it is confident an industry bottom has already formed.
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Originally Posted June 29, 2023 – Good economic data, cautious-looking response
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