Investors are greeting the third quarter with greater trepidation about a recession, and that makes next Friday\u2019s June jobs report a potentially bigger catalyst for markets than it might otherwise have been.<\/p>\n
The jobs report and Wednesday\u2019s release of minutes from the Federal Reserve\u2019s last interest rate meeting are expected to highlight the four-day, post-holiday week.<\/p>\n
June\u2019s nonfarm payrolls are expected to have slowed from the 390,000 added in May, but still show solid job growth and a strong labor market. According to Dow Jones, economists expect 250,000 payrolls were added in June and the unemployment rate held steady at 3.6%.<\/p>\n
But economists expect to see a slowing in employment data, as the Fed\u2019s tighter rates policy squeezes employers and the economy. There is a chance some of those cracks in the labor market could start to appear on Friday. Some slowing would be seen as a positive, but there\u2019s a balance between a slower, less hot job market and one that has gotten too cool.<\/p>\n
\u201cEmployment should slow from May. Whether it goes to 250,000 consensus or more, there\u2019s always volatility,\u201d said David Page, head of macro economic research at AXA Investment Managers. \u201cThe trend is going to be lower, and I wouldn\u2019t mind betting it would be in 150,000 to 200,000 by early Q3, and it could be certainly lower by the end of the year.\u201d<\/p>\n
A rate of 150,000 to 200,000 is still strong and closer to the pre-pandemic pace of job growth.<\/p>\n
Page said there has been a slowing in other data, including consumer spending, income and the employment component of the ISM June manufacturing survey. The employment component fell for a third month to 47.3. A level under 50 signals contraction.<\/p>\n
\u201cThat\u2019s part of a trend we\u2019re seeing emerge. It\u2019s very evidently a slowdown in the economy,\u201d Page said. \u201cThe warning signs are starting to emerge, and the more we see those warning signs start to trickle into the labor market, the more the Federal Reserve is going to have to take heed and that\u2019s what puts such focus on next Friday\u2019s payroll report.\u201d<\/p>\n
On the other hand, if the jobs number is particularly strong, markets could react negatively since it would mean the Fed would feel forced to move ahead aggressively to fight inflation with larger rate hikes.<\/p>\n
Fed impact<\/strong><\/p>\n \u201cIf the employment data is strong, and the Fed officials on paper sound as hawkish as they do verbally, I would think that would continue to put pressure on the market,\u201d said Sam Stovall, chief investment strategist at CFRA. \u201cIf one of the major barometers of how well higher rates are affecting the economy does not show, it is affecting the economy. The implication or inference would be the Fed still has more to go.\u201d<\/p>\n Many economists expect the Fed will raise interest rates by another 75 basis points at its next policy meeting in late July, but the path for September is less certain. A basis point equals 0.01%.<\/p>\n Page said he expects the Fed will debate the size of July\u2019s hike more than the market believes, and the central bank could end up raising rates by a lower-than-expected 50 basis points. Page expects the Fed to be sensitive to the slowing economy and tightening of financial conditions.<\/p>\n He noted there are few instances in history where the Fed has managed \u201ca soft landing on such a narrow landing strip.\u201d<\/p>\n A major issue for markets is that the economy can easily fall into recession, and it can be hard to predict. This week market pros became more concerned about an economic downturn, after weaker data and comments from Fed Chair Jerome Powell. Powell indicated the Fed will do what it needs with interest rate hikes to tame inflation, triggering worries policymakers will be willing to bring on a recession to slow price increases.<\/p>\n \u201cYou can be traveling along, then you hit a certain tipping point,\u201d Page said. \u201cIt starts with something as amorphous as market sentiment. The market sentiment starts to evaporate. …That\u2019s when financial conditions start to tighten. … That has a knock on to economic activity.\u201d<\/p>\n Economists are divided on when and whether the economy will enter a recession, but increasingly markets are pricing in an economic contraction.<\/p>\n The Atlanta Fed\u2019s GDP Now tracker shows the economy is already in a recession, with a forecast of gross domestic product declining 2.1% in the second quarter. If that forecast were accurate, it would make for a second negative quarter in a row, or what\u2019s considered a recession on Wall Street. The first quarter contracted by 1.6%.<\/p>\n Other economists, however, are not forecasting a recession for the current period, and Page sees 1.5% growth in the second quarter.<\/p>\n New test for stocks?<\/strong><\/p>\n Stocks in the past week were sharply lower, as Treasury yields also fell on recession expectations. The 10-year yield stood at 2.89% on Friday, tumbling from 3.49% just two weeks ago. Some strategists had expected to see an up week for stocks as portfolio managers bought equities to rebalance their portfolios at the end of the second quarter.<\/p>\n The S&P 500 rallied 1.1% Friday but was off 2.2% for the week, ending at 3,825. The Nasdaq Composite gained 0.9% Friday, but was down 4.1% for the week.<\/p>\n \u201cRight now, the market is trying to stabilize with some real quarterly flows,\u201d said Scott Redler, partner with T3Live.com. Redler said if the start of the new quarter and month does not bring in fresh money and support the market in the next several sessions, that will be a negative sign for stocks and could signal that the market will soon test its lows.<\/p>\n \u201cI think the market is caught between two narratives,\u201d said Redler. \u201cI don\u2019t know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go another 75 basis points and keep going, but now the market wants softer news. But is the landing going to be soft or hard? It\u2019s like threading the needle right now.\u201d<\/p>\n Redler said he believes the market is in the \u201cseventh inning of this correction.\u201d<\/p>\n \u201cIf you haven\u2019t sold yet, it\u2019s probably not the time to do it. At this point, it\u2019s a high probability that we test the [S&P 500] low of 3,638, and then it\u2019s just a question of whether we make new lows,\u201d he said. \u201cA lot of people are focused on 3,400 on the S&P 500.\u201d<\/p>\n Strategists say the market will also focus on earnings season, and many expect a choppy reaction once companies begin reporting and lowering future profit guidance. Earnings begin with big banks reporting July 14 and 15.<\/p>\n \u201cThe only bullish narrative the market has right now is it can go up on bad news,\u201d said Redler. \u201cAt this point, it\u2019s just a matter of how long this contraction will go that the Fed started. They wanted this.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" Investors are greeting the third quarter with greater trepidation about a recession, and that makes […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-916","post","type-post","status-publish","format-standard","hentry","category-news"],"yoast_head":"\n