Weekly Market Update: June 12, 2023
The nation created 339,000 jobs in May. That figure handily exceeded the consensus forecast of 190,000 and pushed the total number of jobs added through the first five months of 2023 above 1.5 million. The strong nonfarm payrolls report was greeted kindly by Wall Street, as it raised hope that a soft landing for the economy is possible even as the Federal Reserve may not yet have completed its cycle of rate increases, the most restrictive monetary policy course in four decades, aiming to tame inflation.
There were aspects to the May labor report that had to please the Federal Reserve. The unemployment rate ticked up last month (from 3.4% to 3.7%), suggesting that the Fed’s goal to cool the labor market is starting to take hold. Likewise, the average hourly wage increased 11 cents (or 0.3%), which was down from the 0.5% pace recorded in April. On a 12-month basis, wages were up 4.3%, a modest decline from the previous month and a sign that inflation in the labor market is gradually easing. The Fed, though, will likely need to see more progress to end its monetary-tightening phase.
Meanwhile, the deal to suspend the debt ceiling limit was finalized. This eliminated a headwind for the U.S. economy and stock market, as it removed the possibility that the government would default on its debt obligations and jeopardize the credit rating of the United States. However, it should be noted that the agreement may result in a larger auction of U.S. Treasury notes in the coming weeks, which would likely put downward pressure on bond prices and drive rates higher.
The odds of at least a mild recession are high. Several factors suggest that we are headed into a period of economic contraction, including the continued inversion of the Treasury market yield curve, two consecutive quarters of lower profits for the S&P 500 companies, and the recent decline in oil prices.
Conclusion: The stock market rallied at the start of June, fueled by the debt ceiling agreement and strong jobs data. That said, we don’t think caution should be thrown to the wind, as economic concerns persist and there is still much uncertainty about what the Fed will do on the interest-rate front.