Strong labor market equals weaker financial markets

Surprisingly strong labor data fed the bears on fears of a more aggressive Fed. Bonds sold off, as did the broadly-based Russell 2000 index. Defensive sectors like utilities and staples are in green today, while cyclical, value and growth stocks tumble. The VIX, Wall Street’s fear index, rose sharply on the selloff, rising to its highest level in over a month to 15.7 at the time of writing. Oil gave back some of recent gains.

Bottom-line: Risk-off.

TODAY’S MAJOR NEWS

Resilient labor market points to rate hike

The strength in the US labor market looks to give the Fed plenty of ammo to go forward with another rate hike at their next meeting later this month to tame wage inflation, adding negativity to financial markets. Federal Reserve minutes released yesterday from the June FOMC meeting indicated that “almost all” Fed officials said that “additional rate increases would be appropriate” this year; they noted a still-tight labor market and “upside risks” to inflation even after their year-plus campaign of rate increases.

Some Fed officials were favoring a 25-basis-point increase last month but the wait-and-see approach won the majority. Markets are seeing an 92% chance of a hike at the Fed's July meeting, according to the CME FedWatch tool. No rate cuts are expected by Fed members until calendar 2024.

• ADP reported that US companies added 497,000 jobs in June, up from 267,000 in May – twice what was expected, and the largest number in over a year
• Initial jobless claims for the week ending July 1 only slightly exceeded estimates at 248,000, up from 236,00 in the week prior
• Continuing claims fell short of expectations at 1.72 million, down from a revised-lower 1.73 million in the week prior
• The Job Openings and Labor Turnover Survey (JOLTS) showed that those quitting job quits in the US rose sharply to 4.015 million in May, the highest level seen yet in 2023 and adding to the ongoing tightness in the labor market
• Of 497,000 jobs created by private businesses in the US in June, the vast majority (373,000) were in the service sector, in leisure & hospitality, trade/transportation/utilities, and health/education
• However, job openings in the U.S. did fall to 9.824 million in May, below the 10.103 million seen in April

Services driving global growth, Purchasing Manager’s Indexes (PMI)

• S&P Global's June Composite PMI was revised higher on its final reading today, climbing to 53.2, after 54.3 and 53.4 in May and April (readings above 50 point to economic expansion)
• The strength was again driven by the service sector, with the US Services PMI being revised upward to 54.4 from its preliminary 54.1 reading
• The stickiness of inflation derives in part from a resilient US service sector, with the tight labor market adding to price pressures as input costs in June rose at their fastest pace in five months
• Demand in the service sector remained strong in June, with new orders climbing and leading to strong employment
• A similar story was seen on ISM's Services PMI for the US, coming in at 53.9 in June, a sharp increase from the 50.3 seen in May
• The new orders portion of the index saw a sharp rebound to 55.5 in June from May's 52.9
• The employment portion of the index saw a sharp rebound to 53.1 after the contractionary reading of 49.2 seen in May

Manufacturing sector still gloomy

• Conversely, the US manufacturing sector continues to be gloomy, with the Manufacturing PMI confirmed at 46.3 in June, the sharpest contraction seen since December
• Pressures from rising interest rates continue to weigh on demand, with new orders continuing to look ugly
• One positive of the slowdown is that it has allowed manufacturers to improve their performance as supply chain issues continue to ease, getting caught up on backlogs of work and drawing down inventories

Grain’s bullish on crop concerns

The grain trade doesn’t appear to be ready to give up on bullish crop concerns, even after ratings steadied on Monday afternoon. While the overall weather pattern has shifted in recent weeks as expected, it’s not bringing much rain to the northern and northwestern corn belt, with the main rain track persistently running through the central and southern Plains and Midwest.

Our lead forecaster Commodity Weather Group projects dryness concerns rising up to up one-quarter of the belt by the 11-15 day time frame, which looks drier again for the north. Cooler temperatures there will help but corn needs precipitation to shoot and for pollination.

Soybeans will be the favored commodity for the bulls going forward, after the USDA threw a wrench in the supply side with their four million acre cut on 6/30, and a better demand picture than corn thanks to strong crush and increasing capacity in coming years. Wheat does have risk premium to weigh heading into the expiration of the Black Sea export deal, unlikely to be extended by all accounts, with constant complaints from the Russian side.

TODAY’S MAJOR MARKETS

Equity markets

• Markets fell for a second day in morning trade, with the Russell 2000, Nasdaq and the S&P 500 off 1.9%, 1.0% and 0.9% respectively
• Global markets were markedly weaker, with the DAX, FTSE 100 and Nikkei 225 off 2.6%, 2.2% and 1.7% respectively
• The VIX, Wall Street’s fear index, rose sharply to 15.7

Currencies and Bonds

• The dollar index fell 0.2% against a basket of currencies to 103.2
• The Euro/dollar and Sterling/dollar cross-rate both rose 0.2%
• Bond yields crossed psychologically important levels, as yields on 2- and 10-year Treasuries rose to 5.05% and 4.05% respectively – with shorter dated bonds being hardest hit

Commodities

• Gold prices were off 0.6% at $1,916 per ounce
• Crude oil prices fell 0.3% to $71.6 per barrel
• Grain prices benefitted from poor US weather patterns, and the fear of poor harvests

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]