MARKET UPDATE: JOB OPENINGS, ADP EMPLOYMENT REPORT, FEDERAL RESERVE INTEREST RATE DECISION, US EMPLOYMENT REPORT

What We Are Watching This Week

• S&P Final US Services PMI
• ISM Services
• Consumer Credit
• Initial Jobless Claims 

Highlights From Last Week

• Job Openings
• ADP Employment Report
• Federal Reserve interest rate Decision
• US Employment Report

Major benchmarks closed lower as investors navigated the busiest week of quarterly earnings reports and significant monthly economic data. The rotation towards value stocks and small-caps stalled, with the small-cap Russell 2000 Index dropping sharply at the week’s end. However, an equal-weighted version of the large-cap S&P 500 Index performed better than the market-weighted version, indicating a shift away from reliance on major technology companies like the Magnificent Seven. The Nasdaq Composite fell over 10% from its July high, entering a technical correction.

During the week, companies representing nearly 40% of the S&P 500’s market capitalization reported second-quarter earnings, including Microsoft, Meta Platforms, Apple, and Amazon.com. A recurring theme was significant capital spending to enhance artificial intelligence (A.I.) capabilities. Amazon.com’s shares dropped over 11% after reporting capital expenditures exceeding USD 30 billion in the first half of the year, with expected growth in the second half to support A.I. demands on AWS, its cloud computing division. Microsoft reported USD 19 billion in spending in the second quarter, with plans to increase outlays. Meta projected spending of USD 37 billion–USD 40 billion in the second half, while Alphabet planned approximately USD 24 billion over the same period.

Canadian equities fell sharply on Friday, following the trend set by U.S. markets, as disappointing U.S. jobs data raised concerns about increased inflation. The TSX Composite Index dropped 495.58 points, or 2.2%, to close at 22,227.63, marking its worst week since September 2023, with a weekly loss of 587 points, or 2.6%. Meanwhile, the Canadian dollar edged up by 0.08 cents to 72.12 cents U.S.  Following the U.S., the technology sector was hit hardest. The energy sector suffered, as did health care, while communication and utilities provided some relief, finishing in the green.

The pan-European STOXX Europe 600 Index fell by 2.92% for the week in local currency terms, as weak U.S. economic data triggered concerns about global growth, leading to declines in major stock indexes. Germany’s DAX dropped by 4.11%, France’s CAC 40 Index decreased by 3.54%, and Italy’s FTSE MIB fell by 5.30%. The U.K.’s FTSE 100 Index saw a smaller decline of 1.34%. In the bond markets, U.K. gilt yields decreased after the Bank of England (BoE) lowered borrowing costs for the first time in four years. German bund yields also fell as investors anticipated potential further rate cuts from the European Central Bank later in the year.

According to the Bureau of Labor Statistics, the number of U.S. job openings remained 8.2 million in June. This figure represents a decline of 941,000 compared to the previous year. The job openings rate stayed steady at 4.9%. The report also noted little change in the number of hires and total separations, which were 5.3 million and 5.1 million, respectively. Within separations, the number of quits was 3.3 million, while layoffs and discharges stood at 1.5 million. Industry-specific changes included an increase in job openings in accommodation and food services (+120,000) and state and local government, excluding education (+94,000). Conversely, job openings decreased in durable goods manufacturing (-88,000) and the federal government (-62,000).¹

In July, the Conference Board Consumer Confidence Index increased to 100.3 from a revised 97.8 in June. The Present Situation Index, which reflects consumers’ assessment of current business and labor market conditions, decreased slightly to 133.6 from 135.3. Meanwhile, the Expectations Index, which gauges consumers’ short-term outlook for income, business, and labor market conditions, rose to 78.2 from 72.8 in June but remained below the threshold of 80, which typically signals a potential recession. Dana M. Peterson, Chief Economist at The Conference Board, noted that while confidence increased, it did not surpass the narrow range seen over the past two years. Consumers continue to express concerns about high prices, interest rates, and uncertainty about the future, which may not improve until the following year. In terms of future expectations, consumers were slightly less pessimistic, with improved expectations for future income. However, they remained generally negative about business and employment conditions ahead. Consumers were also less optimistic about current labor and business conditions, with assessments of the current labor market situation declining to the lowest level since March 2021, possibly influenced by smaller monthly job additions. Confidence increased among consumers under 35 and those aged 55 and older, while it declined for those aged 35-54. On a six-month moving average, confidence was highest among consumers under 35. Although no clear pattern emerged regarding income groups on a month-over-month basis, consumers earning over $100,000 were the most confident on a six-month moving average. However, the gap with other groups narrowed.²

ADP reported on Wednesday that private job growth in July slowed significantly, with companies adding only 122,000 jobs, the lowest since January and below the revised 155,000 in June. This was also less than the 150,000 jobs economists expected. Wage growth also decelerated, with wages for workers who stayed in their jobs rising 4.8% year-over-year, the smallest increase since July 2021, and down slightly from June. Nela Richardson, ADP’s chief economist, noted that the slowing wage growth aligns with the Federal Reserve’s efforts to control inflation, indicating that future inflation spikes are unlikely to be driven by labor costs. Following this report, stock index futures rose, and Treasury yields fell. Additionally, the Labor Department’s Bureau of Labor Statistics reported that the employment cost index, a key inflation indicator, rose just 0.9% in the second quarter, lower than the first quarter’s 1.2% increase and below expectations of a 1% rise. This suggests that the Federal Reserve might consider a rate cut in September. Job growth was mainly concentrated in trade, transportation, and utilities (61,000 jobs) and construction (39,000 jobs). Other sectors with gains included leisure and hospitality (24,000), education and health services (22,000), and other services (19,000). Conversely, some sectors experienced losses: professional and business services (-37,000), information (-18,000), and manufacturing (-4,000). Companies with fewer than 50 employees saw a decrease of 7,000 jobs. Regionally, the South led with a gain of 55,000 jobs, while the Midwest added only 17,000. The ADP report precedes the Labor Department’s nonfarm payrolls report later in the week, which includes government jobs and is expected to show a job growth of 185,000 in July, down from 206,000 in June, with unemployment steady at 4.1%.³

The Federal Reserve is considering an interest rate cut to stimulate the U.S. economy, with a decision potentially coming by mid-September. On Wednesday, the Fed kept its key interest rate unchanged but indicated that a reduction might occur soon due to easing inflation and a cooling job market. Recent data showing slowing wage growth supports the case for a rate cut. In a statement after a two-day meeting, the Fed acknowledged that inflation has decreased over the past year, although it remains somewhat elevated. The Fed noted progress toward its 2 percent inflation target, marking a change from its June assessment, which described inflation as “elevated” with “modest” progress. The Fed also cited a weakening labor market, with moderated job gains and a slightly increased unemployment rate, as a rationale for potential rate cuts. The Fed aims to achieve maximum employment and maintain a 2 percent inflation rate long-term. The Committee believes that the risks to these goals are becoming more balanced. Chairman Jerome Powell noted that restrictive monetary policy has helped reduce inflation, allowing a shift in focus toward employment. The economic outlook remains uncertain, with the Fed considering both sides of its dual mandate.⁴

In the week ending July 27, the seasonally adjusted initial claims for unemployment benefits increased to 249,000, up by 14,000 from the previous week’s unrevised level of 235,000. The four-week moving average also rose by 2,500 to 238,000 from last week’s average of 235,500. Meanwhile, for the week ending July 13, the total number of continued claims for benefits across all programs decreased by 31,446 to 1,938,827. In comparison, there were 1,860,636 weekly claims filed in all programs during the same week in 2023.⁵

The S&P Global U.S. Manufacturing PMI for July 2024 was revised slightly upward to 49.6 from the preliminary estimate of 49.5, marking the lowest reading of the year and indicating a decline in business conditions for U.S. manufacturers. New orders fell for the first time in three months. Still, ongoing work on outstanding business and a near-record replenishment of finished goods inventories supported a slight increase in output, although growth was minimal. Employment levels also weakened. Output prices rose marginally at their slowest rate in a year, while input costs increased significantly due to higher prices for energy, freight, labor, and raw materials. Despite this, the overall inflation rate eased to a four-month low. Business optimism improved somewhat, driven by hopes that the current demand slowdown is temporary, with expectations of a boost in new business following the Presidential Election.⁶

In July, the manufacturing sector experienced its fourth consecutive month of contraction and the 20th contraction in the last 21 months, according to the Manufacturing ISM Report On Business. The Manufacturing PMI dropped to 46.8 percent, down from 48.5 percent in June, indicating a contraction in manufacturing but continued expansion of the overall economy for the 51st consecutive month. A PMI above 42.5 percent generally signals overall economic expansion. The New Orders Index remained in contraction, falling to 47.4 percent from 49.3 percent in June. The Production Index also declined to 45.9 percent from June’s 48.5 percent. The Prices Index increased slightly to 52.9 percent, indicating rising prices. The Backlog of Orders Index held steady at 41.7 percent. The Employment Index significantly dropped to 43.4 percent from 49.3 percent in June. The Supplier Deliveries Index rose to 52.6 percent, indicating slower deliveries as demand increased, while the Inventories Index decreased to 44.5 percent from 45.4 percent. The New Export Orders Index improved slightly to 49 percent, up from 48.8 percent in June. The Imports Index remained in contraction at 48.6 percent, slightly up from 48.5 percent in June.⁷

In July, the U.S. unemployment rate rose by 0.2 percentage points to 4.3 percent, with the number of unemployed people increasing by 352,000 to 7.2 million. These figures are higher than a year ago when the unemployment rate was 3.5 percent, and 5.9 million people were unemployed. The unemployment rate for adult men rose to 4.0 percent, and for Whites, it increased to 3.8 percent. Rates for adult women, teenagers, Blacks, Asians, and Hispanics showed little change. The number of people on temporary layoff grew by 249,000 to 1.1 million, while permanent job losers remained stable at 1.7 million. The long-term unemployed, those without a job for 27 weeks or more, remained at 1.5 million, accounting for 21.6 percent of the unemployed. The labor force participation rate held steady at 62.7 percent, and the employment-population ratio was unchanged at 60.0 percent. Part-time employment for economic reasons rose by 346,000 to 4.6 million. The number of people not in the labor force who wanted a job increased by 366,000 to 5.6 million, countering the previous month’s decline. The number of discouraged workers remained unchanged at 405,000.⁸

1. https://www.bls.gov/news.release/jolts.nr0.htm
2. https://www.conference-board.org/topics/consumer-confidence
3. https://adp-ri-nrip-static.adp.com/artifacts/us_ner/20240731/ADP_NATIONAL_EMPLOYMENT_REPORT_Press_Release_2024_07%20FINAL.pdf?_ga=2.70775952.1416434872.1722428124-832399304.1709730628
4. https://www.federalreserve.gov/newsevents/pressreleases/monetary20240731a.htm
5. https://www.dol.gov/ui/data.pdf
6. https://www.pmi.spglobal.com/Public/Home/PressRelease/d95f4d0bf69142a4a971ad9e3368d65a
7. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/july/
8. https://www.bls.gov/news.release/empsit.nr0.htm

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Canadian Industry Regulation Organization (CIRO) and the Canadian Investor Protection Fund (CIPF).

Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors. Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavours to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.