Good Economic Data Spurs Interest Rate Worries (July 7 Market Recap)

July 9, 2023

Good Economic Data Spurs Interest Rate Worries (July 7 Market Recap)

Indices

Dow 33,734, -673 or -1.96%.
Nasdaq 13,660, -127 or -0.92%.
MSCI EAFE 2087.72, -44.00 or –2.06%.
S&P 4,398, -52 or -1.17%.
USD10Y 4.05%, +23.1bp or +6.05%.
WTI Crude $73.67 bbl, +3.06 or +4.33%.

Good Economic Data Spurs Interest Rate Worries

Despite the shortened trading week due to the July 4th celebrations on Tuesday, it was nonetheless a busy and interesting week on Wall Street. Amongst a flurry of economic data there were only three somewhat negative reports; U.S. manufacturing is still in contraction, Job Openings (JOLTS) declined to under 10 million, and the Non-Farm Payrolls report was lighter than expected. Yet even these data points could be spun positively given that they may give the Fed less reason to continue to raise rates.

However, the release on Wednesday of the Fed’s June meeting minutes dominated trading for the balance of the week. While the Fed was unanimous in its decision to pause rate hikes at the June meeting, investors focused on the fact that nearly all FOMC members were inclined to raise rates once more in 2023 and a majority of members favored at least two additional hikes. While the Non-Farm Payroll report on Friday indicated that the labor market is cooling, the Street’s fears of additional hikes were stoked further by the increase in Average Hourly Wages and the decrease in the Unemployment rate.

Inflation Data

On the inflation front, the Australian Central Bank left their rates unchanged, stating that “inflation has passed its peak” and Goldman Sachs lowered their end of year inflation expectation (Core PCE) to +3.5% down from +3.7% (Core PCE currently stands at +4.6%).

Next week will see the release of June’s Consumer Price Index. The month-over-month (MoM) number will be watched closely with investors expecting +0.3% vs last month’s +0.1%. However, the year-over-year (YoY) number will most likely drop significantly, from +4% in May to +3.1% in June depending on the MoM number. And it’s just not the headline number that is falling: Core CPI YoY is expected to fall to +5% vs +5.3% last month and Producer Prices (wholesale prices) are expected to fall again to +0.4% year-over-year vs +1.1% last month.

All of which begs the question, does the Fed really need to raise rates twice more this year? With research demonstrating that monetary policy has a 4-to-29-month lag from implantation, perhaps an additional pause or three is in order?

Next Week

Multiple Fed officials are scheduled to speak this week. Inflation data via June’s CPI and PPI will be heavily scrutinized on Wednesday and Thursday respectively and the first reading of Consumer Sentiment in July is released on Friday.

Economic Calendar

Monday – Multiple Fed officials speak.
Tuesday – N/A.
Wednesday – June Consumer Price Index, Richmond and Atlanta Fed Presidents speak.
Thursday – Initial Jobless Claims, June Producer Price Index.
Friday – July preliminary University of Michigan Consumer Sentiment.

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July 7 Daily Trading Recap…

Monday – Dow +10 to 34,418, Nasdaq +28 to 13,816, S&P +5 to 4,455, USD10Y +3.9bp to 3.858%.

Nine of eleven S&P sectors traded higher, led by Consumer Discretionary, Real Estate, and Consumer Staples.
June S&P U.S. Manufacturing PMI was in line with expectations at 46.3.
June ISM Manufacturing Index was below expectations at 46% vs 47.3% expectations.
Australia’s Central Bank left rates unchanged, stating that inflation has “passed its peak.”
Goldman Sachs lowered its end of year inflation forecast (Core PCE) to +3.5% (previously +3.7%) citing declining used car auction prices, falling apartment rents, summer seasonality, and a loosening of the labor market.

Tuesday – Markets Closed in Observance of Independence Day.

Wednesday – Dow +129 to 34,288, Nasdaq -25 to 13,791, S&P –8 to 4,446, USD10Y +8.7bp to 3.945%

Seven of eleven S&P sectors traded down, led by Materials, Industrials, and Technology.
Fed minutes from their July meeting indicated that while pausing rate hikes was a unanimous decision, nearly all members were in favor of at least one more rate hike and a majority were in favor of two or more before the end of the year.

Thursday – Dow -366 to 33,922, Nasdaq -112 to 13,679, S&P -35 to 4,411, USD10Y +9.6bp to 4.041%.

All eleven S&P sectors traded down, led lower by Energy, Consumer Discretionary, and Utilities.
June ADP Private Payrolls soared to 497,000 jobs added for the month vs 220,000 expected and last month’s 267,000 jobs added.
Jobless claims rose slightly to 248,000 vs the 245,000 forecast and last week’s slightly revised lower print of 236,000 (vs 239,000 originally).
May Job Openings and Labor Turnover Survey fell below 10 million to 9.8 million openings.
June U.S. S&P Services PMI was better at 54.4 vs 54.1 expected.
June U.S. ISM Services Index was 53.9% vs 51.3% expected.

Friday – Dow -187 to 33,734, Nasdaq -18 to 13,660, S&P -12 to 4,398, USD10Y +0.9bp to 4.050%.

Six of the eleven S&P sectors traded down today, led by Consumer Staples, Health Care, and Utilities.
June Non-Farm Payrolls were weaker than expected at 209,000 jobs created vs expectations of 240,000 and vs last month’s 306,000 additions.
The June Unemployment Rate fell to 3.6% vs last month’s 3.7% figure.
June Average Hourly Wages increased +0.4% vs expectations of +0.3% and vs last month’s +0.4% increase.

Disclaimer: This is not a recommendation to buy or sell any of the securities listed above. I personally, or a family member whose account I control, have positions in the following securities/assets…Bitcoin, Cardano, Chainlink, Ethereum, ETHE, GBTC, and TSLA.