Wall Street digested another positive jobs report with no associated gains, as good jobs news likely means the Federal Reserve will remain aggressive on interest rates.
MANHATTAN (CN) — Fears of a recession were subdued this week as another jobs report showing better-than-expected employment gains helped U.S. markets emerge from a winning week to kick off the second half. of 2022.
Gains for the week were moderate on Wall Street, with the Dow Jones Industrial Average rising just 242 points for the week, the S&P 500 74 points and the Nasdaq 508 points.
On Friday, the US Bureau of Labor Statistics noted that the economy added 372,000 jobs last month, all from the private sector and well above the 250,000 jobs that many analysts had predicted. Wage growth also rose just 0.3% in June for a total increase of 5.1% per year so far, third-month growth increases have declined.
Due to job gains in June, the three-month average from March is 374,000 jobs gained per month. Gains have been fairly consistent across sectors, although the leisure and hospitality sector still remains 1.3 million jobs below the sector’s pre-pandemic peak.
Wall Street had a muted reaction to the report, with markets swinging slightly positive and negative throughout the day as investors wonder if this means the Federal Reserve will continue to aggressively raise interest rates. Bond yields rose sharply again on Friday morning, with the 10-year Treasury bill standing nearly 3.1% late in the session.
Analysts, however, applauded the report as a splash of cold water to all the recent talk of the recession. The strong jobs report “appears to poke fun at claims that the economy is heading towards, let alone already, a recession,” said Andrew Hunter, senior U.S. economist at Capital Economics.
“Overall, today’s report just means the Fed still has some work to do on policy rates,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “At the end of the day, what matters here for investors is not how fast the Fed raises rates, but how high they have to go to slow the economy.”
There were, however, a few weak spots in the jobs report. The last two employment reports were revised down by 74,000 jobs, and the labor force participation rate fell 0.1% to 62.2%, as the employment-to-population ratio fell to 59.9 %. However, the unemployment rate of 3.6% is at an all-time high, giving analysts some hope.
“Despite the decline in labor market participation, we believe the conditions for a continued rebound in labor supply remain in place, with rising wages and inflation likely to push more workers marginalized people to re-enter the workforce in the coming months,” Oxford Economics wrote. analyst Lydia Boussour in a note to investors.
Experts are now leaning towards the Fed keeping its foot on the accelerator pedal when it comes to interest rate hikes – with some even pointing out that the recently released meeting minutes mentioned inflation about 90 times without mention the word “recession” at all. However, the Fed’s pressure on the accelerator pedal is up for debate.
The consensus appears to be at least a 0.5% interest rate hike, but some believe a 0.75% rate hike is in the works after it already did so for the first time in almost 30 years at its June meeting. The current interest rate for the overnight federal funds rate is between 1.5% and 1.75%.
Some believe the Fed is determined to raise interest rates by 75 basis points at its next meeting. “The high number not only maintains focus on 75bps in July, which now looks like a done deal, but also means we could see a similar 75bps move in September, especially if we get a strong [core inflation] issue next week,” Michael Hewson of CMC Markets wrote in an investor note.
Based on the minutes of the last meeting, where all but one of the attendees supported a 75 basis point rate hike, the Fed certainly seems poised to stick with the 0.75% rate hikes. Indeed, the minutes note that recent inflation data indicates “considerable likelihood of 7 basis point moves at the June and July meetings.”
However, the minutes also suggest the Fed may pause interest rate hikes later this year. “Participants noted that with the fed funds rate expected to be near or above estimates of its longer-term level later this year, the committee would then be well placed to determine the appropriate pace for further policy firming. and the extent to which economic developments warranted policy adjustments,” read the minutes.
The way forward could be further hikes of 50 basis points at the Fed’s fall meetings, with a possible hike of 25 basis points at its last meeting of the year.
The Fed meets again July 26-27.
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