It has been a huge week of earnings in terms of the volume of reports. It has not been a huge week for the stock market — at least not in terms of big returns. On the contrary, it has been a big week of losses thus far, predominately because we have seen a big jump in long-term rates. Entering today, the Nasdaq Composite is down 2.5% and the S&P 500 is down 1.8%.
The move in rates was precipitated by the much larger-than-expected increase in ADP private-sector payrolls on Wednesday, although the Fitch Ratings downgrade of U.S. credit to AA+ from AAA has stolen the show as a talking point when it comes to discussing the move in rates. The 10-yr note yield is up 19 basis points this week to 4.16% while the 30-yr bond yield is up 24 basis points to 4.27%.
Strikingly, the 2-yr note yield has climbed only two basis points this week to 4.89%, so the visual is a curve-steepening trade that one would typically associate with a more positive view of economic conditions. That view, as we all know, is the subject of much debate, yet the prevailing view in the stock market’s price action is that the proverbial glass is half full and not half empty.
The July Employment Situation Report isn’t likely to change that perspective. Granted nonfarm payroll growth is slowing, checking in below 200,000 for the second straight month after revisions, but the unemployment rate, which fell to 3.5% in July, is in the realm of a 50-year low and is a beacon of full employment that will keep consumers spending along with the increase in real earnings.
The key takeaway from the report is that labor supply continues to be tight, which could make it difficult to achieve a more Fed-pleasing moderation in wage growth. That might not translate into another increase in the target range for the fed funds rate, but it does fit the notion that the Fed will be inclined to keep the policy rate higher for longer.
Notable headlines from the July Employment Situation Report:
- July nonfarm payrolls increased by 187,000 (Briefing.com consensus 200,000). The 3-month average for total nonfarm payrolls slipped to 218,000 from 228,000. June nonfarm payrolls revised to 185,000 from 209,000. May nonfarm payrolls revised to 281,000 from 306,000.
- July private sector payrolls increased by 172,000 (Briefing.com consensus 175,000). June private sector payrolls revised to 128,000 from 149,000. May private sector payrolls revised to 255,000 from 259,000.
- July unemployment rate was 3.5% (Briefing.com consensus 3.6%), versus 3.6% in June. Persons unemployed for 27 weeks or more accounted for 19.9% of the unemployed versus 18.5% in June. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.7% versus 6.9% in June.
- July average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus 0.4% in June. Over the last 12 months, average hourly earnings have risen 4.4%, versus 4.4% for the 12 months ending in June.
- The average workweek in July was 34.3 hours (Briefing.com consensus 34.4), versus 34.4 hours in June. Manufacturing workweek was unchanged at 40.1 hours. Factory overtime was unchanged at 3.0 hours.
- The labor force participation rate held steady at 62.6% for the fifth consecutive month.
- The employment-population ratio increased to 60.4% from 60.3% in June.
The equity futures market found the July employment report pleasing on balance and moved modestly higher in its wake. Currently, the S&P 500 futures are up 14 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 73 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 47 points and are trading 0.2% above fair value.
It had been more mixed prior to the release, driven by a wait-and-see mentality in front of the data and a mixed response to the earnings reports from Apple (AAPL), which is down 2.6%, and Amazon.com (AMZN), which is up 9.7%. The improvement, in turn, was aided by an improvement in the Treasury market after the data.
The 2-yr note yield, at 4.93% just before the report, is now at 4.89%, down one basis point from yesterday’s settlement, and the 10-yr note yield, at 4.20% just before the report, is now at 4.16%, down three basis points.
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Originally Posted August 4, 2023 – July employment report is mostly crowd pleasing
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