Why the latest labor market data is the worst-case scenario for stock market bulls

NYSE Stock Trader Jerome Powell

Traders work on the floor of the New York Stock Exchange (NYSE) as Federal Reserve Board Chairman Jerome Powell holds a news conference on December 19, 2018 in New York City.Spencer Platt/Getty Images

  • The US labor market still seems to be in turmoil.

  • Thursday’s ADP data was a double estimate from economists, with an overall gain of 497,000 jobs.

  • The reading suggests further rate hikes from the Fed and headwinds for equities.

The stock market doesn’t like Thursday’s jobs data.

Private payrolls jumped 497,000 in June, ADP reported, the biggest monthly gain since last July and more than double what economists expected.

The massive beat shows that after months of warnings of further monetary policy tightening to come, stock market bulls may be on top of their skis, and that Federal Reserve Chairman Jerome Powell was right. to say that more needs to be done to cool the economy.

“The labor market is not easing at all according to this ADP report,” said Edward Moya, senior market analyst at Oanda. “The data-dependent Fed will be looking at the labor market and that should support the case for much more tightening.”

Stocks were down across the board as of midday Thursday, with the Dow Jones Industrial Average down nearly 500 points, and the S&P 500 and Nasdaq Composite down more than 1%.

Bond yields also jumped as traders bet the Fed was poised to resume rate hikes after pausing in June to let in more data. The two-year Treasury yield topped 5% for the first time since 2007.

“The ADP number came out strong and yields are above recent highs, with the two-year cross above 5% and the 10-year above 4%,” said New York Stock Exchange senior strategist Michael Reinking. . “So you see that psychological response in stocks.”

Thursday’s market response illustrates the disconnect between the Fed and the stock market. Optimistic that the rate hikes are almost over, bull traders have launched a new bull market this year, even as Powell and his colleagues at the Fed have repeatedly said that there is still work to be done. remove heat from the economy.

Reinking notes that a strong labor market is a better reason to raise rates than, say, inflation hitting multi-decade highs. In any case, he doesn’t see Thursday’s ADP report changing much for the Fed.

“I don’t think that necessarily changes the course of monetary policy,” he said. “From my perspective, that doesn’t change the fact that 25 basis points in July is in the cards.”

Investors are betting there’s a 95% chance of a quarter-point rise this month, according to the CME FedWatch Tool, but there’s room to tighten even more if the labor market also stay warm.

“If job growth and/or inflation continue to be stronger than expected in the second half of 2023, the Fed could proceed with not one but two additional quarter-percentage-point rate hikes. before pausing in the first half of 2024,” Bill Adams, chief economist at Comerica Bank, said in a note.

Meanwhile, separate data released on Thursday showed the ISM services index for June rose from 50.3 to 53.9, beating estimates.

On Friday, economists expect to see 240,000 non-farm payrolls added last month, a slowdown from 339,000 in May.

Read the original article on Business Insider

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