Week in Review: July,7, 2023

July 10, 2023

Recap & Commentary

Markets ended the holiday-shortened week down as investors had a flurry of economic data and the release of the June FOMC meeting minutes to digest. The minutes confirmed that most members favored keeping the target range in place during the month but that some felt an additional hike was warranted given the strength of the labor market and the slow progress of bringing core inflation back to target. Noting the strength in the labor market and consumer spending, participants acknowledged that a scenario where the economy could continue to grow slowly and avoid a downturn was almost as likely as the base case for a mild recession in the latter portions of 2023. The committee also noted that a period of below-trend growth in real GDP and softening in the labor market would be needed to return inflation to 2 percent over time, likely pushing any potential for rate cuts further out. After the release of the meeting minutes and the June jobs data, bond yields climbed back toward 2023 highs, with the 2-year and 10-year topping 5% and 4%, respectively. The average rate on a 30-year fixed mortgage crossed 7.2%, a 31 basis point increase since last week. By Friday, the likelihood of a 25 basis point rate increase at the July Fed meeting stood at 93%.

Economic Commentary

The divide between the U.S. manufacturing and service sectors continued to grow in June. Manufacturing PMI came in at 46, lower than consensus expectations for a reading of 47.2. New orders and backlog of orders remained contractionary in June, but this marked the first month that the employment index also slipped into negative territory, potentially indicating that low workloads are beginning to impact employer headcount. The index has had eight consecutive readings below 50, indicating the U.S. is in a manufacturing recession, but continued strength in the services sector has provided a boost to the overall economy. Services PMI came in at 53.9, well ahead of expectations for a reading of 50.8. The new orders and business activity index grew by 2.6% and 7.7%, respectively, since last month and remained comfortably in expansion territory. Services employment increased 3.9% to 53.1 after slightly dipping into contraction territory last month. The prices index continued to move downward to 54.1 in June from 56.2 in May, but prices in the sector remain too elevated, with 2/3 of major service industries reporting higher prices paid during the month.

Job openings declined by 496k to approximately 9.8MM in May, lower than the expected level of 9.94MM. This reading marked a two-year low for job openings, but there’s still approximately 1.6 available jobs for every unemployed person. This level of openings remains elevated relative to pre-pandemic levels. 4MM people quit their jobs in May, most notably in the health care and construction fields. This was a 250k increase from April and is indicative of workers’ continued confidence in the labor market. Non-farm payrolls increased 209k in June but missed consensus forecasts for the creation of 230k jobs. The unemployment rate, derived from the household survey, remained relatively unchanged at 3.6%. The average hours worked increased by .1 hours to 34.4 hours per week. Average hourly earnings also increased by .4%, slightly ahead of May’s .3% increase. This was the first time in 15 months the jobs data has come in below forecasts, but this reading, combined with persistently strong wage growth, illustrates the continued strength of the labor market.

Of Note

The U.N.’s nuclear watchdog granted approval for TEPCO, which ran the destroyed Fukushima power plant, to start releasing more than a million tons of treated radioactive wastewater into the ocean, despite international opposition.

Market Indices   (As of 07/07/2023)

• June CPI
• June PPI
• Consumer Sentiment
• Weekly Jobless Claims