Sightline Weekly Market Update: Can the Fed Orchestrate a Soft Landing?
Stocks rebounded last week on economic releases giving hope to investors that the Fed may be able to orchestrate a soft landing. Except for the TSX and the Dow Jones, which eked out less than 1% in the week, all other North American and significant European indices tacked on well over 1% in the week. Oil was the drag on the Canadian index, as prospects of a recession hurting demand saw oil back below $100 after falling 8% on Tuesday before recovering by week’s end. The best performing sectors in the week were communication services, consumer discretionary, and information technology.
On Wednesday, following last week’s ISM Manufacturing Index, the ISM Services Index showed growth but was 0.6 percentage points lower at 55.3% compared to May’s reading of 55.9%. The latest reading is the lowest since May of 2020 (45.2). The Business Activity Index increased 1.6 percentage points over May’s reading, and the New Orders index was two percentage points lower than May’s reading.1 Also, on Wednesday, the Bureau of Labor Statistics released the number of job openings for the last business day of May, showing a decrease to 11.3 million. While job openings have slipped in the previous two months, with readings over 11 million for six straight months and meager layoff rates, there is a persistently tight labor market. On Wednesday, the minutes for the June Fed meeting were released, indicating that the Fed officials “recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2% as critical to achieving maximum employment on a sustained basis.” Further, they “judged that an increase of 50 or 75 bp would likely be appropriate at the next meeting.” The latest CPI data “indicates that inflation pressures have yet to show signs of abating, and a number of them saw it as solidifying the view that inflation would be more persistent than they had previously anticipated.”3
On Thursday, the jobless claims came in slightly higher than anticipated at 235,000 compared to the Street estimate of 230,000. Continuing claims from all programs were 1,327,839, up 13,570 from the previous week.4 Indications are that some businesses have adopted a hiring freeze, becoming defensive in anticipation of the economy slowing later in the year and into 2023. The Commerce Department reported that the US trade deficit, since hitting a record $107.7 billion in March, narrowed to $85.5 billion in May. Exports rose 1.2% to $255.9 billion, while imports rose 0.6% to $341.4 billion.5 The easing trade deficit will help improve the GDP growth for the second quarter.
On Friday, the June US jobs number was more substantial than expected at 372,000. The employment rate remained unchanged at 3.6%. Labor force participation rates slipped to 62.2 %, below the February 2020 level of 63.4%.6 A poll by the Wall Street Journal had forecast 250,000 new jobs. 7 Also, on Friday, the Federal Reserve showed that credit for June, while rising to $22.3 billion or a 5.9% annual rate, is sharply lower than March, April and May.8 Usually, higher credit card use indicates economic strength; however, in periods of higher inflation, increasing credit use reflects higher prices. As the economy cools, borrowing is likely to slow.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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