Rates retest March highs as Economic Data Stronger than Expected! – Halyard’s Weekly Wrap – 7/7/23

We guessed correctly last week that Chairman Powell’s comment in Portugal would supersede the June FOMC minutes, depriving the market of any unforeseen volatility.  With that, the highlight of this week’s data releases was the monthly employment report.

It was a mixed bag as the economy gained 209,000 new jobs versus the 230,000 consensus expectation.  That disappointment was offset by a greater than expected jump in average hourly wages.  The wage measure came in at a 4.4% annualized rate versus the 4.2% expectation.  The unemployment rate ticked down to 3.6%.  A loosely interpreted rule of thumb is that the economy will continue to grow when more than 200,000 jobs are added per month.  The BLS report was especially disappointing when compared to the private ADP jobs measure released on Thursday that showed a whopping gain of 497,000 new jobs.  As we have cautioned in the past, seasonal adjustments applied to the BLS measure cause the two reports to deviate from time to time.  Also of note, the revision to the previous two months was 110,000 jobs lower.

Regardless, the market interpreted the data as solid and reacted accordingly.  The two-year note and the 5-year note have completely erased the flight-to-panic banking crisis gains and are now priced for a hawkish Federal Reserve once again.  Equity investors also have reacted to the news with some profit taking, but nothing to suggest that the bull market of the last eight months has ended.

Looking to next week, the forecast is that inflation in June fell meaningfully and is approaching the 2% level that the Fed views as inflation nirvana.  The month-over-month headline is forecast to rise 0.2% but what’s likely to get the Fed and the market excited is that the year-over-year rate is expected to come in at 3.0%, down from 4.0% in May and a “chip shot” away from the Fed’s target rate.  The question is, will that outcome pose a dilemma for the Fed and their strong hint that rates will rise at the next two meetings, and the answer is a resounding NO.  The reason is that when you strip out food and energy, so called “core” inflation, the expectation is for a year-over-year inflation of 5.0%.  Still way too high!

Also coming next week are the first earnings releases of the second quarter.  With the banking crisis still at the fore of investor’s memories, J.P. Morgan, Citibank, and Wells Fargo report next Friday and Bank of America, and Morgan Stanley report on July 18^th.  Of the five, only J.P. Morgan has recovered from the March swoon, so even a mild positive surprise is likely to boost share prices in the banking sector.