Friday's Market Minute: Market Suggests What's Good For The Economy Is Good For Stocks

The prospect of another rate hike in July likely will increase on the back of solid jobs report, and equity markets might follow through with additional short-term weakness as the shift in long-term interest rates and inflation expectations adjusts accordingly. The consensus is for 225,000 new jobs created compared to May’s additions of 339,000 and for the unemployment rate to be unchanged at 3.7%. Yesterday’s ADP private sector employment report was well above consensus expectations and showed 497,000 private sector jobs were added in June.

Meanwhile, equities floundered as the two-year U.S. Treasury yield hit 5.12%, briefly exceeding the pre-banking crisis highs established in March. Notable weakness was visible in the Russell 2000 relative to the broad S&P 500 index. This was expected, considering a large percentage of small-cap companies are not profitable, more sensitive to credit market funding, and don’t always have a reliable number of analyst earnings forecasts. Overall market trends since October suggest investors seem eager to buy on good economic news. However, one should continue to expect equities to vacillate between the notion that what is good for the economy is good for corporate profits, household income, and performance of equities – or days like yesterday where good economic news is bad for equities, conditioned upon a sudden shift of higher interest rates and inflation expectations. 

In total, the labor market has remained astonishingly resilient despite the Fed’s sustained interest rate rises since early 2022. Given the elevated core inflation, an ISM Services Index that establishes a resumptive uptrend compared to May, and overall solid labor growth, the Fed appears justified enough to resume rate hikes this month.

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