A shortened trading week after the 4th of July holiday but we did see that the economy continues to grow and the jobs market is steady and not too hot with the jobs data released on Friday. However, monetary policy changes work on lags and the rate hikes over the last year are beginning to do their job as part-time workers rise and jobless claims trend higher.
However, it is hard to say that the economic data of late is warning of a recession and the jobs data on Friday was cool enough to infer the Fed has only 1-2 more rate hikes this year.
The Stock Market
With the Fed held at bay, the stock market has an opportunity to run up to one more new high but the S&P needs to start trending where volatility is low and dips are buying opportunities. For now, the S&P has consolidated for four weeks above the August 2022 high at $432 and that is constructive for another move higher. Seasonality trends are very good the first three weeks of July so that is a good set-up and next there will be Q2 earnings reports where earnings projections will be under close scrutiny.
The Fed’s Balance Sheet
The Fed’s bond holdings declined $87B in June and are now $667B lower than the April 2022 peak. Also, the Fed has reversed the $435B in assets that were added to liquify the banking system after the Silicon Valley failure in March.
For perspective, the chart below shows how much the Fed’s balance sheet has grown since the financial crisis. As you can see, assets held were declining into COVID but spiked when the pandemic shutdown the global economy. There is no more room to expand the balance sheet now so this form of tightening will continue for some time.
Economic Data
- Nonfarm payrolls rose 209,000 in June which is a decent number but the lowest since 2020 and the first below expectations in over a year. Also, April and May were revised down a total 110,000. So far this year, 1.67 million jobs have been created.
- Average hourly earnings for private-sector workers rose 4.4% from a year earlier as income rose because hours worked was higher in June.
- Part-time workers increased 452,000 last month to 4.2 million, a 12% jump from the prior month and the biggest month-over-month increase since April 2020.
- The unemployment rate is now 3.6% and has been in this ultra-low range of 3.4% to 3.8% since February 2022.
- Second quarter car deliveries have been reported and automakers have been busy. The supply chain in the auto industry has abated and some brands are now oversupplied. Year over year gains are reported on the adjacent graphic:
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Paul J McCarthy III
President, Kisco Capital