- Stocks stumbled in choppy trading during the first week of July as more tough talk from the Federal Reserve, uninspiring economic reports, and mixed jobs data weighed on investors. The S&P 500 retreated -1.2%, the Russell 2000 fell -1.3%, and the Nasdaq slipped -0.9%.
- Employment data was mixed, with the latest Non-Farm Payrolls report coming in below Wall Street expectations for the first time in fourteen months. That came just a day after much hotter-than-expected private hiring data was reported by payroll processor ADP.
- The yield curve steepened after weeks of inverting. The benchmark 10-year U.S. Treasury yield popped +22 basis points (bps) to 4.06%, while the 2-year U.S. Treasury yield rose +5 bps to 4.95%. The Bloomberg U.S. Aggregate Bond Index fell -1.3% for the week.
Stocks and bonds stall in first week of the third quarter
After big gains in June, stocks stumbled in choppy trading during the first week of July as more tough talk from the Federal Reserve, uninspiring economic reports, and mixed jobs data tested investor’s resolve. On Friday investors digested the latest Non-Farm Payrolls report, which came in under Wall Street expectations for the first time in fourteen months and came just one day after a much hotter-than-expected private hiring report from payroll processor ADP. Economic data in the US, and around the world, was less than stellar with most indicators weaker than expected. The week started with weaker-than-expected manufacturing PMI readings for the services sector in China but spread to weaker PMI readings for most major economies in the Eurozone. Here in the U.S., manufacturing PMIs fell sharply, pushing into contraction territory – although U.S. services PMIs are still robust and well into expansionary levels. The Federal Reserve also released the FOMC minutes from its June monetary policy meeting, which showed several members favored raising the key policy rate by 25 basis points, citing the still-tight labor market, stronger-than-expected economic activity, and persistently high inflation. On the other hand, almost all participants agreed that maintaining the target range at 5.00%-5.25% was appropriate for that meeting to give them more time to assess the impact of the tightening cycle on the economy. Despite the pause in rate hikes in June, the Fed minutes were hawkish with almost all the participants agreeing that additional rate increases would be needed. At publication time, markets were pricing in a 90% probability that the Fed will raise rates by 25 basis points at the meeting on July 25-26.
Most major global stock markets were down for the week with that background. The S&P 500 Index retreated -1.2%, the small cap Russell 2000 Index fell -1.3%, and the Nasdaq Composite Index slipped -0.9%. Overseas, developed market international stocks continued to lag their U.S. counterparts, as the MSCI EAFE Index dropped -2.1%. Following its worst week since October 2022, the MSCI Emerging Markets Index was a relative outperformer among equity indices but still lost -0.9%.
Yields were up on the week, especially the longer end of the curve, reversing some of the last several weeks of yield curve inversion. The benchmark 10-year U.S. Treasury yield popped +22 basis points (bps) to 4.06%, just a few basis points below its highs of March. The 30-year U.S. Treasury yield rose +18 bps to 4.05%, while the 2-year U.S. Treasury yield rose +5 bps to 4.95%. At one point the 2-year yield touched a 16-year high around 5.1%, but then settled back below 5%. The higher yields hindered bond returns as the Bloomberg U.S. Aggregate Bond Index fell -1.3% for the week and Bloomberg Global Aggregate ex U.S. Bond Index slipped -0.2%.
Chart of the Week
On Friday the Labor Department’s Employment Situation report for June showed that U.S. employers added a seasonally adjusted 209,000 jobs during the month, down from a negatively revised 306,000 in May (originally 339,000), and below Wall Street expectations for 230,000. That ended a streak of fourteen consecutive months of payrolls exceeding Wall Street forecasts and was the smallest increase in new jobs since December 2020. In addition, April and May have revised down a cumulative -110,000 jobs. As shown below, payrolls have been trending lower, declining from the prior month’s reading in eight of the last twelve months. Moreover, the increase in hiring in June was even weaker than it seemed with approximately 30% of the new jobs last month created by the government. Stripping out the 60,000 government jobs resulted in just 149,000 private NFP jobs, also the lowest level since December 2020. The Unemployment Rate remained unchanged at 3.6%, as expected, and just below May’s 3.7%. Average Hourly Earnings were up +0.4% in June, just above expectations and May’s level which were both +0.3%. Year-over-year, Average Hourly Earnings were up a solid +4.4%, also just above expectations for +4.2% and last month’s +4.3%. As expected, Labor-Force Participation was unchanged at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%, but at the highest level since the pandemic. After pausing in June, the Federal Reserve is widely expected to raise rates later this month and despite coming in on the lighter side, the June employment report isn’t likely to change that.
U.S. Jobs Market Is Cooling
Monthly change in Non-Farm Payrolls (NFP)
Note: Seasonally adjusted.
Source: Labor Department, Bespoke Investment Group.
- Economic activity in the manufacturing sector contracted in June for the eighth consecutive month following 28 months of growth. The Institute for Supply Management’s (ISM) Manufacturing Index fell to 46.0% in June from 46.9% in May, which was well below Wall Street expectations of 47.1% (levels below 50% signal economic contraction). It was the lowest reading since May 2020 and is the longest monthly losing streak since the 2007-2009 Great Recession. Like the overall index, the Production Gauge component fell to its lowest level since May 2020, down -4.4 points to 46.7%, suggesting demand for merchandise remains weak. The Employment Barometer declined again after falling into contraction in May, falling 3.3 points to 48.1%. Inventories were the primary detractor in June, shrinking at the fastest pace since October. New Orders were in contraction for the tenth straight month but did manage to climb 3.0 points to 45.6%. The Prices Paid index plunged even further into contraction territory after rebounding to expansion in April, it was down to 41.8% from 44.5% in May and 53.2% in April.
- The ISM Non-Manufacturing (Service) Index expanded for the sixth month in a row, jumping to 53.9 in June from 50.3% in May, well above expectations of 51.2% (the line between expansion and contraction is 50%). The increase was robust with 15 of the 18 components in the index rising. New Orders jumped to 55.5% from the prior month’s 52.9% level. The Employment Barometer also rose, up to 53.1% from the 49.2% contraction level it dropped to the prior month. Inflation edged lower with the Prices Paid Index falling to 54.1% from 56.2% in May.
- The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index (PMI) took a sharp turn downward in June, falling to 46.3 from 48.4 in May and 50.2 in April, one of the fastest rates of decline seen over the last 13 years (levels above 50 indicate economic expansion, while levels below 50 indicate contraction). The deterioration in the demand for goods continued as New Orders saw the steepest decline of the year, and second fastest in three years, slumping to 42.9 from 47.1 the prior year. On the inflation front, Input Costs fell for the second month in a row to the lowest level since May 2020, the fastest decline in over three years.
- The S&P Global US Services PMI fell in June for the first time since December but remains well into expansion territory at 54.4 versus 54.9 in May and a bit higher than the flash estimate of 54.1. New Orders increased for the fourth successive month in June but were down fractionally from May’s 13-month high. Input Costs rose the most since January as a result of higher wage bills.
- May Factory Orders rose +0.3%, in line with April’s downwardly revised +0.3% growth (originally +0.4%) and less than half of expectations for +0.8% growth. It’s the fifth rise in the last six months for Factory Orders, but it has been under Wall Street estimates in five of those six months. Transportation orders had the biggest gain. After stripping out Transportation, Factory Orders declined -0.5% while April’s reading was revised down from a decline of -0.2% down to a drop of -0.6%. On a year-over-year basis, Factory Orders dipped into negative territory for the first time since October 2020. Readings have been negative in every recession since 1960, but there were numerous other periods where they were also negative and the economy didn’t fall into recession. Durable-Goods Orders rose an upwardly revised +1.8% (up from the initial report of +1.7% — Durable Goods are released ahead of the full report). Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.7% in May following a +1.3% rise in April. Nondurable Goods orders fell -1.2%.
- The Commerce Department reported Construction Spending was up +0.9% in May to a seasonally adjusted annual rate of $1.93 trillion, beating expectations for a +0.6% rise and April’s massive negatively revised +0.4%, marked down from the initial release of +1.2%. Year-over-year (YoY), total construction spending was up +2.4%, compared to +1.4% for the year ended April. Total Private Construction was up +1.1% month-over-month while total Public Construction rose +0.1% month-over-month. Private Residential Construction rose +2.2% in May but was down -11.4% YoY. In terms of Private Non-Residential Construction, it slipped -0.2% for the month, down from +1.4% in April, but up +17.3% YoY. Overall, the report showed Private Residential Construction, particularly single-family construction, is showing resilience despite the jump in mortgage rates.
- The weekly MBA Mortgage Application Index fell -4.4% for the week ended June 30, following the prior week’s +3.0% gain. The Purchase Index was down -4.6% following a +2.8% rise the prior week and the Refinance Index fell -4.1% following a +3.3% gain the prior week. The average 30-Year Mortgage Rate rose for the second straight week, up +10 basis points to 6.85%, which is +1.11 percentage points higher than a year earlier.
- The May Job Openings Labor Turnover Survey (JOLTS) report fell below the 10 million mark for the third time this year, dropping to 9.8 million, below expectations for a 9.9 million listing and the prior month’s 10.3 million (revised up from 10.1 million). Job openings in retail, health care, transportation, and warehousing rose the most — parts of the economy that have led the way in hiring. The number of job openings for each unemployed worker fell to 1.6 in May from 1.8 in April, keeping it well above pre-pandemic levels of 1.2. The Fed is watching the ratio closely and wants to see it fall back to pre-pandemic norms. Job openings are an indication of the health of the labor market and the broader U.S. economy. The Hiring Rate inched up to 4.0% from 3.9% the prior month and has been little changed in recent months. In a surprise, the Quits Rate had its first increase since last fall with a rebound to 2.6% from 2.4% the prior month, which was the lowest level since February 2021. It peaked at 3.3% a little over a year ago.
- Weekly Initial Jobless Claims rose -27,000 to 248,000 for the week ended June 30, above expectations for 245,000 and last week’s 236,000 reading (revised down from 239,000). Most of the increase took place in a few states, including Michigan and New York, and might partly reflect annual summer retooling at automobile plants. The number of people already collecting unemployment claims (i.e. Continuing Claims) fell -13,000 to 1,720,000 in the week ended June 23, better than expectations for 1,737,000 and below last week’s reading of 1,733,00 (revised down from 1,742,00).
The Week Ahead
The coming week is light on economic data, with the focus likely to be inflation with June Consumer Price Index (CPI) and Producer Price Index (PPI), due out next Wednesday and Thursday, respectively, as well as Friday’s Import Prices and Consumer Inflation Expectations from the University of Michigan’s Consumer Sentiment report. Any big surprises in the inflation readings could impact the direction of the Federal Reserve’s policy. There will also be several public addresses from Federal Reserve speakers, including three on Monday alone.
Did You Know?
SEEKING FINANCIAL ADVICE – In the 2023 Financial Confidence Survey from Unbiased, only a third of respondents felt confident in their financial knowledge, while 29% said they lack confidence due to not being taught the topic in school. A whopping 82% of respondents said they feel too intimidated to seek financial advice even if they needed it (Source: Unbiased, MFS).
HIGHER THAN LOWER – June’s Consumer Confidence report marked the first time since January 2022 that a higher percentage of consumers expected higher stock prices than lower stock prices. The 17-month streak of negative sentiment towards stock prices was the second longest since 1987 trailing only the 18-month streak spanning the Financial Crisis from November 2007 through April 2009 (Source: Conference Board, MFS).
CHECK NOT IN THE MAIL – Student loan payments are scheduled to resume in October which could impact consumer spending going forward. According to a survey from Morgan Stanley, only 29% of consumers who have outstanding student loans say they will have enough money to make those payments without adjusting spending in other areas, and 34% say they cannot make any payments at all. (Source: Insider, MFS).
This Week in History
DOLLAR DEBUT – On July 6, 1785, the U.S. Congress declared that “the money unit of the United States of America be one dollar.” (Source: The Wall Street Journal)
Asset Class Performance
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.