June 2023
The June payroll gain was the slowest in 30 months, coming in at 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.
The consumer price index, ex-food and energy, released days after the employment report, registered a better than forecast 4.8% year-over-year, besting the 5.0% forecast and the 5.3% recorded last month. We’re somewhat skeptical of the improvement as a big driver was falling airfares which doesn’t jibe with Delta airlines profit beat and forecast boost announced in July. The upbeat report on inflation continued with the producer price index ex-food and energy, which rose 2.4% year-over-year, down from 2.8% last month.
The paradox is that hawkishness dominated the conversation last month as Chairman Powell presented the annual state of the economy to Congress. His comments were broadly in line with his post-FOMC comments with emphasis that the June pause was just that and that the overnight rate is likely to rise further later this year, perhaps even twice. He then redoubled his hawkishness at the gathering of central bankers in Sintra, Portugal the following week, this time emphasizing the effectiveness quantitative tightening has played in monetary policy over the last year and a half. The market had taken his comments at face value and pushed interest rates higher to reflect that. That is until the employment and inflation reports prompted investors to reevaluate the need for additional hikes and have fully erased the move higher in interest rates.
In non-market related news, the Securities and Exchange Commission amended the rules by which money market funds operate. It was the third time in 15 years that the SEC changed money fund rules. The moves are designed to prevent panicky investors from pulling money during times of market stress such as those witnessed in 2008 and 2020. Our take is that they make money market funds even less attractive to investors. The specific changes are that funds would impose a fee of up to 2% when net daily redemption exceed 5%; the funds are now required to hold 25% of the assets under management in overnight holdings, up from the previous mandate of 10%; and the funds will be required to hold 50% of assets in holdings that are deemed to have weekly liquidity, up from 30%. Funds have 18 months to become compliant with the rules. Reading between the lines, the rule changes hasten the demise of prime money-market funds (those that invest in higher yielding non-government securities) in favor of government-only funds, coming coincidently when the U.S. government debt continues to explode.
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