Equity markets finished the week mixed, with the TSX, Dow Jones and the S&P MidCap 400 slightly lower, whereas the S&P 500 and Russell 2000 and most major European indices closed higher. The TSX was partly pulled lower by commodity prices, including a 10.4% decline in the price of crude. Earnings coming in higher than expectations supported equities; however, later in the week, the stronger-than-expected jobs report triggered discussions around the Federal Reserve’s interest rate policy. Investors reacted to Federal Reserve Chair Jerome Powell’s comments early in the week following the July 26-27 policy meeting. Market participants interpreted Powell’s comments as dovish, pricing in lower rate hikes in the coming months, and talks of the Fed pivot. The jobs report later in the week dampened enthusiasm, causing investors to reassess the pace of future rate hikes.
On Monday, the ISM (Institute for Supply and Management) gauge of manufacturing activity slipped to a 25-month low of 52.8% from 53% in June. The July reading is the third monthly decline in a row and signals the strength of the general economy. (A reading above 50 indicates growth). The New Orders Index was down to 48 percent from 49.2 percent, and the Production index declined but was above 50 at 53.5 percent from 54.9 in June. The Prices index declined to 60 percent (the lowest reading since August 2020) from the June reading of 78.5 percent, and the Backlog of Orders Index fell 1.9 percent to 51.3 percent. 1
Last Tuesday, the Labor Department reported job openings in June fell to 10.7 from 11.3 million in May. The June reading is the third consecutive monthly decline after peaking at 11.9 million. The quits rate fell slightly to 4.23 million, consistently exceeding the 4 million mark since last year. The most significant number of decreases were in retail (-343,000), wholesale trade (-82,000), and state and local government (-62,000). 2
In a sign that the consumer could be under some strain, according to the Federal Reserve of New York, consumer credit card debt jumped in the second quarter by $46 billion. The latest increase is the fastest increase in over 20 years and a sign that the consumer is feeling the pain of inflation and higher interest rates. Increases are widespread, including substantial increases in mortgages and auto and credit card balances. Delinquencies in credit card debt increased 3.35% over the same period last year.3
On Wednesday, the ISM Services Index rose to a three-month high of 56.7 percent in July, 1.4 percentage points higher than June’s reading of 55.3 percent. The Business Activity Index jumped 3.8 percent to 59.9 percent compared to the June reading. The New Orders Index figure increased 4.3 percent over the June reading to 59.9 percent. All 13 industries reported growth in June.4 Also reported on Wednesday, factory orders rose 2%, with orders for durable goods, goods lasting more than three years, climbing 2%, and orders for non-durable goods up 2%.5
On Thursday, the Labor Department released the Initial Jobless claims for July 30. Claims increased by 6,000 from the previous week, in line with expectations. Continuing claims for all benefits for the week ending July 16 decreased by 3,890 from the last reading.6
The big economic news of the week occurred on Friday. The nonfarm payrolls jumped by 528,000 jobs in July when a Wall Street Journal poll of economists forecasted 258,000 jobs. Hiring was broad-based but led by gains in leisure and hospitality and professional and business services. The negative of the report was the participation rate, which remains stubbornly low at 62.1%.7
The latest reading stirred investor concern that the strong labor market will allow for continued higher rates. The Q2 negative GDP reading following Q1’s negative print suggests the economy, following traditional thinking, is in a recession. However, in past recessions, consumer and capital investment spending was negatively coupled with job losses. The labor puzzle this time is sending a mixed signal that many believe will allow the policymakers to press ahead with more rate increases delaying the Fed pivot. For these reasons, we believe the market will likely remain choppy until next year if the labor markets remain tight.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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