(Friday market open) June jobs growth cooled to 209,000, the Labor Department said Friday—well below market expectations and in contrast to a sizzling private jobs market report that sent Treasury yields soaring yesterday as investors worried about future interest rate hikes.

The government’s June Nonfarm Payrolls report also downwardly revised jobs growth in the last two monthly reports, subtracting a total of 110,000 positions from those. The 209,000 figure for June shows a sharp decline from a revised 306,000 in May, and was below the Wall Street consensus for 225,000. While jobs growth eased, wage growth of 0.4% came in slightly above 0.3% expectations, which might reinforce concerns that higher pay may be fueling inflation.

In premarket trading, major indexes wavered and then turned lower following the news, while Treasury yields pulled back slightly. There’s little change in the probability of a Federal Reserve rate hike in July. The report is evidence of slowing jobs growth, but perhaps not enough to change the Fed’s near-term policy.

Until yesterday, good news looked like good news once again on Wall Street, with stocks typically rising in response to a string of healthy U.S. economic reports. Thursday’s surprisingly firm June jobs data from payroll processor ADP appeared to abruptly change the dynamic back to “good is bad” for the market. Stocks dove and the 10-year Treasury note yield raced to four-month highs as investors worried that the Federal Reserve could continue its hawkish interest-rate policy well into 2024.

Normally, a strong labor market would be considered positive, but for the Fed it’s a challenge as it tries to push inflation back toward its 2% target rate. As volatility rose, markets fell, and we saw last spring’s pattern reappear: mega-cap stocks like Apple (NASDAQ:) and Microsoft (NASDAQ:) gained ground while info tech retreated along with every other sector. This could be due to some market participants seeking perceived safety in the biggest stocks on the market, as they did during last spring’s banking turmoil.

Morning rush

  • The 10-year Treasury note yield (TNX) fell 2 basis points to 4.02% after the jobs report.
  • The ($DXY) slid to 102.75.
  • Cboe Volatility Index® () futures eased to 15.13 after posting one-month highs yesterday.
  • WTI (/CL) is steady near $72 per barrel.

Just in

June jobs growth was the lowest for any month so far this year, but there’s little sign of wage increases easing.

  • The biggest sector job gains came in government and health care, which are not areas that tend to reflect a hot economy. Construction employment rose 23,000, while other industries associated with a growing economy like transportation and manufacturing saw little change.
  • The large gains earlier this year in leisure and hospitality seem to be in the past, with June being the third-straight month of just small growth. But the smaller growth in that sector, which tends to have lower pay, could help explain the bigger-than-expected increase in June wages.
  • Other metrics like unemployment (3.6%) and labor force participation (62.6%) changed little or not at all in June, the government said.
  • The Labor Department’s last few monthly payrolls reports have included downward revisions to previous months, and June was no exception. It’s a trend worth watching when the July report comes.

Eye on the Fed

Futures trading indicates a 92% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its July meeting, according to the CME FedWatch Tool. This probability was little changed from 91.8% yesterday before the jobs data.

Next week features a packed calendar of Fed speakers, including three on Monday alone. Monday includes remarks from Atlanta Fed President Raphael Bostic, whose words might be worth a closer look. He’s one of the few Fed officials who’ve sounded slightly less hawkish lately.

“We have reached a level of the nominal federal funds rate that should be sufficient to move inflation toward the 2% target over an acceptable timeframe,” Bostic said in late June according to Reuters. “The data, survey results, and on-the-ground intelligence constitute a reasonable case that gradual disinflation will continue.” He added, “I believe that will happen, even if the Committee does not increase the federal funds rate.” The question is whether he departs from this line of thought following this week’s round of strong economic data.

What to Watch

Inflation up next: The ISM Non-Manufacturing Index for June of 53.9 easily exceeded Wall Street’s expectations and suggested continued strength in the sizzling services sector of the economy. That data came out shortly after the ADP report showed jobs growth bolstered by demand for consumer-related services.

Did this unrelenting services sector strength continue to drive consumer prices higher last month? Many people who dine at restaurants or fly on planes are probably nodding “yes” to that. However, the government’s June Consumer Price Index (CPI) and Producer Price Index (PPI), due out next Wednesday and Thursday, respectively, are the official word.

Early analyst consensus on Wall Street is for a 0.3% rise in both CPI and core CPI, but we’ll revisit those estimates from Trading Economics early next week to see whether they change. CPI rose 0.1% in May, while core CPI, which strips out volatile food and energy, rose 0.4%. A slowdown to 0.3% in core CPI would likely be greeted as a welcome summer refresher.

Talking technicals: Despite yesterday’s pullback, major indexes finished well off their lows, and the S&P 500® Index (SPX) didn’t make any attempt to test long-term technical support near 4,330. The close back above 4,400 after falling below that benchmark early in Thursday’s session appeared technically positive.

Sizzling subcontinent: It may be a surprise, but the best-performing stock market in the world last quarter was India, outpacing even Japan’s solid outcome. India’s growth initiatives and demographics might help the world’s fifth-largest economy continue to advance, argues Schwab’s chief global investment strategist Jeffrey Kleintop in his most recent analysis.

Gold Price Daily Chart

CHART OF THE DAY: DOG BITES MAN. Markets often don’t follow their unwritten rules, but in the case of gold (GC- candlesticks) and the 10-year Treasury note yield (TNX-purple line), recent behavior is pretty much what one might expect. Higher yields that reflect worries about tighter U.S. monetary policy and a potentially stronger dollar pushed gold back to levels last seen in early March. Front-month gold dropped to $1,900 an ounce in late June, a level it hasn’t traded below since March 14. Data sources: CME Group (NASDAQ:), Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Mailbox dread: Yesterday, we touched on the U.S. automobile market and why the second half of 2023 might not be as frothy. Here’s another reason: The Supreme Court’s decision last week to block the Biden Administration’s $400 billion student loan forgiveness plan. The average student loan payment is between $200 and $300 a month, according to U.S. News and World Report. Seeing those bills back in the mailbox might sap some folks’ enthusiasm for big-ticket purchases on credit. Speaking of credit, last month, Citizens Financial Group (NYSE:) announced it will stop originating indirect loans through auto dealers. The company reports later this month, and its earnings call could shine a headlight on that decision.

Sector brakes: This week’s jump in volatility and Treasury yields is a reminder that growth stocks often wither in this type of environment, driving many investors toward more defensive realms. That’s been the case the last day or two, but it remains to be seen whether it’s a trend or simply a pause after growth sectors like info tech, consumer discretionary, and communication services led the charge since April. Both small-cap and growth stocks tend to buckle under high-interest rates because these businesses often depend more on borrowed money to grow. High rates can also hinder housing stocks, some of which lost ground Thursday. Investors in these parts of the market might not feel relief soon. Recent U.S. economic data strength like yesterday’s ADP jobs report play into ideas that the Fed could keep rates elevated into 2024. The CME FedWatch tool now shows a 50% chance of the Fed’s target range being 5% or higher a year from now. (It’s currently 5% to 5.25%.) As of a month ago, the tool showed no chance of rates being as high as 5% in mid-2024. That said, there’s plenty of recent data—such as manufacturing—that doesn’t suggest a rip-roaring economy.

Overseas interest: Traditionally, higher U.S. Treasury yields attract foreign investors, sometimes driving Treasury note values higher and yields lower. That was often the case in pre-pandemic years when U.S. yields were lower than they are now but high compared with the then-negative yields in Europe and Japan. That dynamic has changed, mainly because yields in both Europe and the U.S. have risen sharply. But in one major market, China, yields remain very low by comparison. You can’t rule out interest from Chinese corporate buyers in a situation like this, though China has strict controls on individuals moving money out of the mainland. China just lowered the rates it pays investors on dollar deposits in what media reports said appears to be an attempt to shore up the struggling Chinese currency. Chinese firms have more than $900 billion in U.S. currency deposits at Chinese banks, Bloomberg reported.


July 10: May Consumer Credit

July 11: No major earnings or data

July 12: June Consumer Price Index (CPI), Core Consumer Price Index, and the Fed’s Beige Book

July 13: June Producer Price Index (PPI) and expected earnings from Conagra (CAG), Delta Airlines (NYSE:), and PepsiCo (NASDAQ:)

July 14: University of Michigan July Preliminary Consumer Sentiment and expected earnings from JPMorgan Chase (NYSE:), Citigroup (NYSE:), Wells Fargo (NYSE:), and UnitedHealth (NYSE:)

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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