Investors are receiving the third quarter with more recession concern, and that makes next Friday’s June jobs report a greater potential catalyst for markets than they would have otherwise.
The jobs report and the release of the minutes from the Federal Reserve’s latest interest rate meeting on Wednesday are expected to shed light on the four days after the holiday.
Nonfarm payrolls for June are expected to have slowed from the 390,000 added in May, but it still shows solid job growth and a solid labor market. According to Dow Jones, economists expect 250,000 jobs to be added in June and the unemployment rate to hold at 3.6%.
But economists expect to see a slowdown in employment data, as the Fed’s tighter interest rate policy puts pressure on employers and the economy. There is a possibility that some of those cracks in the labor market will start appearing on Friday. Some of the slowdown may be seen as a positive, but there is a balance between a slower and less hot job market and a market that has become very cold.
“Employment should be slow as of May. Whether it reaches 250,000 consensus or more, there is always volatility,” said David Page, head of macroeconomic research at AXA Investment Managers. “The trend is going to be lower, and I don’t mind betting it will be between 150,000 to 200,000 by early Q3, and it could definitely be lower by the end of the year.”
A rate of 150,000-200,000 remains strong and closer to the pace of pre-pandemic job growth.
Page said there was a slowdown in other data, including consumer spending, income and the employment component of the June ISM manufacturing survey. The employment component fell for the third month to 47.3. A level below 50 indicates deflation.
“This is part of a trend we’re seeing,” Page said. “It’s clearly a slowdown in the economy.” “Warning signs are starting to appear, and the more we see those warning signs starting to seep into the labor market, the more the Fed will have to take notice and that’s putting such an emphasis on next Friday’s payroll report.”
On the other hand, if the job number is particularly strong, the markets may react negatively because it will mean that the Fed will feel compelled to press ahead aggressively to fight inflation by raising interest rates further.
“If the employment data is strong, and Fed officials on paper are as hawkish as they are doing verbally, I think that will continue to put pressure on the market,” said Sam Stovall, chief investment analyst at CFRA. “If one of the key measures of how much higher rates are affecting the economy does not appear, it is affecting the economy. The implication or inference is that the Fed still has more to go with.”
Many economists expect the Fed to raise interest rates by another 75 basis points at its next policy meeting in late July, but the path for September is uncertain. The base point is 0.01%.
Page said he expects the Fed to discuss the size of the increase in July more than market beliefs, and the central bank may end up raising interest rates 50 basis points less than expected. Page expects the Fed to be sensitive to a slowing economy and tightening financial conditions.
He noted that there are few instances in history in which the Fed has been able to “fall easily into such a narrow strip of decline.”
One of the main problems for markets is that the economy can easily fall into a recession, and it can be difficult to predict. Market professionals this week became more concerned about the economic downturn, after weak data and comments from Federal Reserve Chairman Jerome Powell. Powell signaled that the Fed would do what it needed to by raising interest rates to tame inflation, prompting fears from policymakers that they would be prepared to trigger a recession to slow rate increases.
“You can travel along, and then you get to a certain tipping point,” Page said. “It starts with something amorphous like market sentiment. Market sentiment starts to evaporate…that’s when financial conditions start to tighten…and that affects economic activity.”
Economists are divided over when and whether the economy will enter a recession, but growing markets are widening in an economic downturn.
The Atlanta Federal Reserve’s now-gross domestic product tracker shows the economy is already in recession, with GDP expected to fall 2.1% in the second quarter. If this forecast is accurate, it will lead to a second negative quarter in a row, or what is considered a Wall Street recession. The first quarter contracted 1.6%.
However, other economists do not expect a recession in the current period, and Page sees 1.5% growth in the second quarter.
New stock test?
Last week, stocks were sharply lower, with Treasury yields also falling amid expectations of a recession. The 10-year yield settled at 2.89% on Friday, down from 3.49% just two weeks ago. Some strategists expected to see a bullish week for stocks as portfolio managers bought shares to rebalance their portfolios at the end of the second quarter.
The S&P 500 rose 1.1% on Friday but fell 2.2% over the week, closing at 3,825. The Nasdaq Composite rose 0.9% on Friday, but fell 4.1% over the week.
“Right now, the market is trying to stabilize with some real quarterly flows,” said Scott Riddler, partner with T3Live.com. Riddler said that if the start of the new quarter and month does not bring fresh money and support to the market in the next several sessions, it will be a negative sign for stocks and may indicate that the market will soon test lows.
“I think the market is stuck between two narratives,” Riddler said. “I don’t know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go to another 75 basis points and hold, but now the market wants softer news. But is the downside going? To be Soft or hard? It’s like sewing a needle now.”
Riddler said he believes the market is in the “seventh inning of this correction.”
“If you haven’t sold yet, this probably isn’t the time to do so. At this point, it’s very likely that we will test [S&P 500] Low at 3638, so it’s just a matter of whether we make new lows. “
Strategists say the market will also focus on earnings season, and many expect a volatile reaction once companies start reporting and lower earnings guidance going forward. Earnings begin with the reporting of major banks on the 14th and 15th of July.
“The only bullish narrative the market has right now is that it could go up due to bad news,” Riddler said. “At this point, it’s only a question of how long this Fed-initiated contraction will last. They wanted it.”
Next week’s calendar
Fourth of July holiday
Markets are closed
10:00 am May factory orders
9:00 a.m. Federal Reserve Bank of New York John Williams
9:45 a.m. Standard & Poor’s Global Services, June PMI
10:00 AM June ISM Services
10:00 AM May tremors
2:00 p.m. FOMC Minutes
8:15 a.m. ADP Recruitment
8:30 a.m. Initial jobless claims
8:30 a.m. May Trade Balance
1:00 p.m. Federal Reserve Governor Christopher Waller
1:00 p.m. Fed President Lewis James Bullard
gains: WD-40, Levi Strauss
8:30 a.m. New York Fed President John Williams
8:30 a.m. June Employment Report
10:00 am may wholesale trade
11:00 a.m. Federal Reserve Bank of New York John Williams
3:00 pm May consumer credit