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Making Sense Of A Strange Jobs Report
The June jobs report was widely characterized as weak. Ed and Elias don’t see it that way. The disappointing headline gain reflected a misleading statistical distortion. June’s decline in Leisure & Hospitality was attributable to an early Memorial Day, which boosted May’s gain. With the support of multiple underlying strengths, the labor market remains resilient, as demand slightly exceeds supply. The Fed’s tightening bias—prioritizing its inflation mandate over its labor market one—therefore remains appropriate, with a July rate hike still possible. … Ed reviews “Disclosure Day” (- -).
ECONOMIC WEEK AHEAD: July 6-10
The S&P 500 closed Thursday at 7,483.23, up 1.8% on the week, while the Nasdaq rose 2.1%. Memory chip stocks pulled back sharply last week, cooling off the parabolic run that followed Micron's blowout June 24 earnings report (chart). Shares surged 17% the next day to a new all-time high of $1,255.00, then closed Thursday at $975.56, down 22.3% from the intra-day high. That is the same pattern as March, when a blowout earnings report also sent shares to a high before a sharp pullback. June's jobs report on Friday adds to the uncertainty. Payrolls rose just 57,000, well below the 115,000 consensus, with April and May revised down a combined 74,000. The unemployment rate still fell to 4.2%, but only because labor market participation dropped to 61.5%, the lowest since March 2021. Nothing on this week’s calendar rivals either of those stories for market impact. Earnings season doesn’t start in earnest until JPMorgan and Citigroup report on July 14. Here are the key economic releases most likely to shape investors' thinking this week: (1) PMI. June's ISM Services PMI (Mon) should remain in expansion territory, according to the comparable S&P Global index (chart). (2) Employment. Initial unemployment insurance claims for the week of June 26 held at 215,000, a 4-week average of 222,000, both within the range of the past two years (chart). Thursday’s report is the most current read on the labor market since the payrolls miss. It should confirm that layoffs remain low (chart). (3) FOMC Minutes. June‘s meeting minutes (Wed) is the first under new Fed Chair Kevin Warsh. He skipped the dot plot in June and has avoided forward guidance since taking over. Fed funds futures now imply 1.5 rate hikes over the next 12 months, a sharp reversal from the deep rate cut pricing that dominated the past three years (chart). The minutes should indicate how much of that repricing the committee actually endorses. (4) Inflation Expectations. June's NY Fed survey of inflation expectations (Tue) is due this week. Its one-year-ahead measure was at 3.5% in May, with the three-year-ahead measure lower still at 3.1% (chart). The gap between the two suggests that consumers see current price pressures as more temporary than structural (5) Global Inflation. June's Eurozone PPI (Mon) is due to open the week’s international data. Japan’s PPI (Thu) accelerated to 6.3% y/y in May, the fastest pace since 2023 (chart). China’s PPI (Wed) rose to 3.9% in May from deeply negative readings a year ago, while the CPI stayed muted at 1.2%. Both probably moderated in June along with falling oil prices.
GLOBAL MARKET CALL: AI Trade Depresses EM Trade
The Go Global trade we’ve recommended since late last year continues to perform well, but leadership among global stock markets rotated this week as Europe took the baton from Asia. Germany, the UK, France, and Sweden led the European country ETF derby. South Korea gave back 8.7% in a sharp bout of profit-taking in semiconductor stocks. This is simply an overdue correction after Korea’s parabolic run, nothing worse. The AI capex boom that underpins the Korea and Taiwan bull markets remains intact. (1) Commodities. The peace dividend has materialized faster than widely expected, as the price of crude oil has plunged to its lowest level since the start of Gulf War III (chart). Before the war, there was a bear market in crude oil. It may be resuming because Chinese demand for oil has declined due to the widespread adoption of EVs in the country. China's economy is also weak. The price of gold is struggling to hold support around $4,000 per ounce (chart). The Fed's recent pivot to a more hawkish monetary policy stance strengthened the dollar and caused the price to fall below its 200-day moving average. We expect the $4,000 support level to hold and are still targeting $5,000 by the end of this year, but with less confidence. (2) Bond Yields. Sovereign 10-year bond yields drifted marginally higher on the week but remain well off their May peaks (chart). The JGB yield continues its steady march higher as the BOJ’s hiking cycle grinds on. (3) Stocks. The Stay Home versus Go Global ratio broke below its long-term uptrend late last year (chart). Last week, the US stock market underperformed the major European stock markets, while outperforming several EMs (first chart). The parabolic ascents of EEM and EMXC this year were led by South Korea and Taiwan (chart). (4) Revenues & Earnings. The forward revenues of the All Country World MSCI remains in record-high territory, confirming that the global economy is doing surprisingly well despite the recent oil price shock (chart). The forward earnings of the All Country World MSCI is also rising rapidly to new record highs (chart). (5) Japan. The yen remains very weak because Japanese short-term interest rates remain well below comparable US interest rates (chart). A weaker yen is a positive for Japanese exporters.
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