Week in Review: June 2, 2023

June 5, 2023

Recap & Commentary

Markets ended the holiday-shortened week with the S&P 500 reaching a new 2023 high as investors cheered the passage of the debt ceiling deal, Friday’s employment report, and comments from Fed officials.

Over the course of the week, the debt ceiling deal negotiated between President Biden and House Speaker McCarthy wound its way through the House and Senate before being signed into law on Saturday by the President. With the debt ceiling now suspended through the end of 2024, investors will likely return their focus to inflation, the Fed, and concerns of a recession.

On the latter point, May’s strong jobs report- 339K new jobs created- suggested no imminent recession. On a headline basis, the job growth was the strongest pace since January. However, other aspects of the report including average hourly wage growth and the unemployment rate pointed to marginally weaker labor conditions, alleviating pressure on the Fed to raise rates again at its upcoming June meeting. That, combined with comments from Federal Reserve governor Philip Jefferson suggesting that a pause in interest rate increases by the Fed at its upcoming June meeting might be prudent, contributed to expectations for a June rate hike plummeting over the course of the week from ~65% to ~20% providing a tailwind to equity markets.

Economic Commentary

Nonfarm payrolls added 339K jobs in May, well above the forecasted 195K. Job gains in March and April were also revised upward by a total of 93K. May’s gains were driven by professional and business services, government, and healthcare. Despite the surge in the headline number, other areas of the report showed less strength. The unemployment rate jumped from 3.4% to 3.7% as household survey data used to calculate unemployment, showed 310K individuals lost jobs in May.  In addition, average annual wage growth slowed from 4.4% in April to 4.3% in May, while the number of weekly hours worked declined to 34.3, the lowest level since Covid surged in April 2020. Separately, job openings, a measure of labor demand, increased by 258K to 10.1M in April.  This reading was far higher than the expected 9.78M and ended three straight monthly declines in job vacancies.

Manufacturing activity contracted in May for the seventh consecutive month, led by a decline in new orders which shrank at their fastest pace since January. Backlog orders contracted for an eight consecutive month, falling to levels last seen in the Great Recession. The deterioration in orders reflects continued weak demand, raising concerns about future economic activity. Employment was one of the few bright spots, expanding for the second consecutive month while rising to its highest level since August 2022.

Consumer confidence declined in May, particularly among consumers over 55 years of age, reflecting a negative assessment of current employment conditions and future business conditions.  Consumer’s inflation expectations over the next 12 months remained elevated, but stable at 6.1%.

Of Note

According to Ned Davis Research, market breadth is currently very narrow, with just 25% of S&P 500 stocks outperforming the index. If that number were to remain unchanged at year end it would be the lowest level in 50 years.

Market Indices   (As of 06/02)

• ISM Services
• Consumer Credit
• Factory Orders
• Weekly Jobless Claims