7/05/24 - Investors React as Labor Market Shows Signs of Cooling Amid Economic Moderation

In a holiday shortened week investors digested a raft of job-related data which overall continues to depict a cooling but still solid labor market.

The Job Openings and Labor Turnover Survey, or JOLTS, on Tuesday showed job openings unexpectedly rose in May by 221,000 to 8.1 million, although the market focused on the downwardly revised April number which was more in line with the declining trend in openings. The closely followed quits rate, an indicator of job availability, held firm at 2.2%, around pre-pandemic levels.

Weekly unemployment claims came in slightly above expectations at 238,000 on Wednesday. Claims data can be volatile, but the four-week moving average has been steadily moving higher since the start of the year. Continuing claims also edged up to 1.86 million, now slightly above 2019 levels.

Friday’s jobs report was the highlight of the week for market watchers. Data showed nonfarm payrolls grew by 206,000 in June, slightly above expectations, while the unemployment rate continued to tick up to 4.1% as more people entered the labor force. Of note, the prior two months were revised down by 111,000 jobs. Average hourly earnings also cooled compared to May, coming in at 0.3% month-on-month, and 3.9% on a year-on-year basis.

Elsewhere, the Institute of Supply Management (ISM) Purchasing Managers’ Index (PMI) for both Manufacturing and Services came in below expectations. These can be useful leading indicators of economic activity with a reading above 50 signaling expansion and below 50, contraction. The Manufacturing PMI came in at 48.5, slightly below estimates, while Services also disappointed, unexpectedly falling 5 points to a four-year low of 48.8. Although the level of the decline was a surprise, the trend in the Services PMI, which applies to a larger share of US economic output, has been steadily decreasing.

Treasury yields fell during the week in response to the softer data. At the time of writing the two-year Treasury yield had declined by around 15 basis points to 4.60%, and the ten-year Treasury yield by around 10 basis points to 4.30%. Based on all the incoming data which shows economic growth and inflation moderating, we believe the Federal Reserve will begin lowering interest rates in the coming months although as long as the labor market remains robust, the pace and magnitude should be measured.

Next Week:

Consumer Credit, Consumer Price Index, Jobless Claims, Producer Price Index, University of Michigan Survey

© 2024 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.