With the big move the stock market made in June and the first half of the year, it is reasonable to think that any weakness seen in the near term is largely a byproduct of the belief that the market is due for a period of consolidation.
In other words, one can point to headline catalysts here and there to explain any weakness, but it really just might be a case of profit taking — and nothing more than that — after a big run.
Frankly, we’re in that middle ground right now where it is difficult to determine the true driver of the market action.
Growth concerns continue to linger, but then again so does the notion that growth is holding up better than many expected. There are earnings worries, but at the same time an eye has been cast on the stronger earnings growth prospects embedded in consensus forecasts for 2024. The Fed is telling us that it will likely raise rates again — maybe multiple times — but the fed funds futures market still thinks it is one and done for the Fed.
If today’s labor data are any indication, the fed funds futures market may soon have to re-think its view.
According to ADP, private sector hiring increased by 497,000 in June (Briefing.com consensus 245,000) following a downwardly revised 267,000 (from 278,000) in May. Jobs in the goods-producing sector increased by 124,000 while jobs in the service-providing sector surged by 373,000. Small and medium businesses led the hiring, registering gains of 299,000 and 183,000, respectively, versus a decline of 8,000 positions at large establishments.
Separately, initial jobless claims for the week ending July 1 increased by 12,000 to 248,000 (Briefing.com consensus 245,000). Continuing jobless claims for the week ending June 24 decreased by 13,000 to 1.720 million.
The key takeaway from the report is much the same: initial jobless claims — a leading indicator — continue to run well below recession-like levels.
The Treasury market has been attentive to this morning’s labor data. The 2-yr note yield, at 4.96% just ahead of the ADP release at 8:15 a.m. ET, is up 14 basis points to 5.08%, and the 10-yr note yield, at 3.97% before the ADP number, is up nine basis points to 4.04%.
The labor data have overshadowed the May Trade Balance Report, which showed a narrowing in the trade deficit to $69.0 billion (Briefing.com consensus -$69.0 billion) from an upwardly revised $74.4 billion (from -$74.6 billion) in April. The deficit moved in a positive direction, but not because of any overwhelming strength in exports. On the contrary, exports were $2.1 billion less than April exports. The swing factor was that imports were $7.5 billion less than April imports.
The key takeaway from the report is that the decline in exports and imports is emblematic of a softening in global demand that one would expect to see in an environment where many of the world’s leading central banks are raising rates.
This bump in market rates is creating a headwind for the stock market in its attempt to keep plowing ahead in the second half of the year, running interference for stocks sporting premium valuations.
It is certainly factoring into this morning’s trading in the futures market. Currently, the S&P 500 futures are down 38 points and are trading 0.9% below fair value, the Nasdaq 100 futures are down 172 points and are trading 1.1% below fair value, and the Dow Jones Industrial Average futures are down 265 points and are trading 0.8% below fair value.
There is more data yet to come today, too, including the May JOLTS – Job Openings Report and the June ISM Non-Manufacturing Index at 10:00 a.m. ET. These reports will hold some market-moving sway.
In the meantime, the stock market will be looking up at yesterday’s closing levels when the opening bell rings, forced to contemplate the specter of the Fed being more aggressive than expected, largely because the labor market is staying a lot stronger than expected.
To that point, New York Fed President Williams (FOMC voter) said late yesterday that recent data suggest the Fed has more work to do, and this morning Dallas Fed President Logan (FOMC voter) said the FOMC needs to make policy more restrictive.
The fed funds futures market knows a 25-basis points rate hike is coming later this month, pricing in a 96.1% probability of such a move. Notable today is that the probability of another 25-basis points rate hike in September has pushed up to 30.8% from 18.1% yesterday, according to the CME FedWatch Tool.
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Originally Posted July 6, 2023 – Strong labor data stirs rate-hike angst
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