What we saw yesterday is that the stock market is starting to pay more attention to rising interest rates. That is the case because rising, risk-free rates create added competition for stocks and create headwinds for further multiple expansion efforts.
The 2-yr note yield hit a 16-year high of 5.12% yesterday before backing down. The 10-yr note yield topped 4.00% for the first time since March (i.e., just before the mini banking crisis). Where they go today is a bit of a mystery, only because the June employment report was relatively bond friendly in terms of payroll growth but less friendly in terms of average hourly earnings growth.
Briefly, nonfarm payrolls increased by 209,000 in June (Briefing.com consensus 220,000) and there were downward revisions to April and May that, combined, showed 110,000 fewer jobs than originally thought. Average hourly earnings, though, increased a stronger than expected 0.4% (Briefing.com consensus 0.3%) and May was revised up to 0.4% (from 0.3%), so the year-over-year change in June was unchanged at 4.4%.
The key takeaway from the report is that it continued to fit in the soft landing zone, as payroll growth slowed but remained positive; meanwhile, an increase in the average workweek and the 0.4% increase in average hourly earnings are a boon for aggregate earnings that will continue to support both discretionary and non-discretionary spending.
Something else the June employment report won’t change is the Fed’s view that additional tightening action is likely going to be appropriate. That view should manifest itself with a 25-basis points rate hike at the July FOMC meeting but the key question is, how much more tightening — if any — will there be after that?
The fed funds futures market still sees a “one-and-done” view of the world. According to the CME FedWatch Tool, the probability of a second rate hike at the September, November, and December FOMC meetings is just 24.0%, 40.4%, and 37.4%, respectively.
That could ratchet higher if next week’s CPI Report for June is unfriendly.
There has been some knee-jerk volatility in the Treasury market and the equity futures market following the release of the employment data. The 2-yr note yield went from 5.02% to 4.91% right after the release, but is back up to 4.99%, down two basis points from yesterday’s settlement. The 10-yr note yield went from 4.07% to 4.01%, but is back up to 4.07%, up three basis points from yesterday’s settlement.
The futures for the major indices all pivoted from negative readings to positive readings before shifting back into negative territory. Currently, the S&P 500 futures are down six points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 17 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 46 points and are trading 0.1% below fair value.
Notable headlines from the June Employment Situation Report:
- June nonfarm payrolls increased by 209,000 (Briefing.com consensus 220,000). The 3-month average for total nonfarm payrolls slipped to 244,000 from 247,000. May nonfarm payrolls revised to 306,000 from 339,000. April nonfarm payrolls revised to 217,000 from 294,000.
- June private sector payrolls increased by 149,000 (Briefing.com consensus 210,000). May private sector payrolls revised to 259,000 from 283,000. April private sector payrolls revised to 179,000 from 253,000.
- June unemployment rate was 3.6% (Briefing.com consensus 3.6%), versus 3.7% in May. Persons unemployed for 27 weeks or more accounted for 18.5% of the unemployed versus 19.8% in May. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.9% versus 6.7% in May.
- June average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus an upwardly revised 0.4% (from 0.3%) in May. Over the last 12 months, average hourly earnings have risen 4.4%, versus 4.4% for the 12 months ending in May.
- The average workweek in June was 34.4 hours (Briefing.com consensus 34.3), versus 34.3 hours in May. Manufacturing workweek was unchanged at 40.1 hours. Factory overtime was unchanged at 3.0 hours.
- The labor force participation rate was unchanged at 62.6%.
- The employment-population ratio was unchanged at 60.3%.
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Originally Posted July 7, 2023 –June employment report fits soft landing and additional rate hike zones
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