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Recession fears flare and jobs report emerge as market moves into Q3


Investors are welcoming the third quarter with greater recession anxiety, and that makes Friday-June’s jobs report a potentially bigger catalyst for the market. compared to what might happen.

Wednesday’s jobs report and minutes from the Federal Reserve’s final interest rate meeting are expected to highlight the week after the four-day holiday break.

Nonfarm payrolls for June are expected to be down from the 390,000 added in May, but still show solid job growth and a strong labor market. According to Dow Jones, economists expect 250,000 payrolls in June and the unemployment rate to hold steady at 3.6%.

However, economists expect the jobs data to slow, as the Fed’s tightening policy is squeezing employers and the economy. There is a chance that some cracks in the labor market could begin to appear on Friday. Some slowdown is seen as positive, but there is a balance between a slower, less hot job market and one that has become too cool.

“Employment will slow from May. Whether it hits 250,000 consensus or better, there’s always volatility,” said David Page, head of macroeconomic research at AXA Investment Managers. . “The trend is going to be lower, and I don’t mind betting it will be at 150,000 to 200,000 at the beginning of Q3 and could certainly be lower at the end of the year.”

The 150,000 to 200,000 ratio is still strong and close to the pre-pandemic job growth rate.

Page said there was a slowdown in other data, including consumer spending, income and the employment component of the ISM’s June manufacturing survey. The employment component fell for the third month to 47.3. Levels below 50 signal a contraction.

“It’s part of the trend we’re seeing emerging. It’s clearly a downturn in the economy,” Page said. “Warning signs are starting to emerge, and the more we see those warning signs begin to spill over into the labor market, the more the Federal Reserve has to pay attention and that’s what the focus is on the report.” Payroll report next Friday.”

On the other hand, if employment numbers are particularly strong, markets could react negatively as it means the Fed will feel strongly forced to go ahead to combat inflation with rate hikes. bigger.

The Fed’s Impact

“If the jobs data is strong and Fed officials on paper sound as hawkish as they do with words, I would think it will continue,” said Sam Stovall, investment strategist at CFRA. put pressure on the market”. “If one of the key measures of how higher interest rates are affecting the economy doesn’t show, it is affecting the economy. The implication or inference is that the Fed still has a lot of work to do. .”

Many economists expect the Fed to raise rates by 75 basis points at its next policy meeting in late July, but the path for September is uncertain. The basis point is equal to 0.01%.

Page said he expects the Fed to argue the size of the July hike more than the market believes, and that the central bank will likely raise interest rates to 50 basis points lower than expected. Page expects the Fed to be sensitive to a slowing economy and tightening financial conditions.

He noted that there are very few instances in history where the Fed has managed a “soft landing on such a narrow runway.”

A big problem for markets is that the economy can easily slip into a recession and be unpredictable. This week, market experts became more concerned about a recession, following weaker data and comments from Fed Chairman Jerome Powell. Powell indicated that the Fed will do what it takes with rate hikes to curb inflation, raising concerns that policymakers will be willing to trigger a recession to slow price increases.

“You can go along, then you hit a certain cut-off point,” says Page. “It starts with something as amorphous as market sentiment. Market sentiment starts to evaporate. … That’s when financial conditions start to tighten. … That impacts activity. economic dynamics.”

Economists are discriminating about when and whether the economy will enter a recession, but more and more markets are pricing in a recession.

The Fed’s GDP Now tracker in Atlanta indicates the economy is already in recession, with gross domestic product forecast to fall 2.1% in the second quarter. If that forecast is correct, it would create a second consecutive negative quarter, or what would be considered a recession on Wall Street. The first quarter fell 1.6%.

However, other economists are not forecasting a recession for the current period, and Page sees 1.5% growth in the second quarter.

New test for stocks?

Stocks have fallen sharply over the past week as Treasury yields have also fallen on recession expectations. The 10 years Yields stood at 2.89% on Friday, down from 3.49% just two weeks ago. Some strategists were expecting saw a bullish week for stocks as portfolio managers bought stocks to rebalance their portfolios at the end of the second quarter.

The S&P 500 rose 1.1% on Friday but fell 2.2% for the week, ending at 3,825. The Nasdaq Composite rose 0.9% on Friday, but fell 4.1% for the week.

Scott Redler, partner at T3Live.com, said: “For now, the market is trying to stabilize with some actual quarterly flows. Redler said if the start of the quarter and the new month doesn’t bring in fresh money and support the market over the next few sessions, that will be a negative sign for equities and could signal that the market will soon test levels. its low.

“I think the market is caught between two stories,” said Redler. “I don’t know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go up by 75 basis points and move on, but now the market wants softer news. But does it matter? Did the landing take place?” soft or hard? It’s like threading a needle right now. “

Redler said he believes the market is in the “seventh round of this correction.”

“If you haven’t sold yet, it’s probably not the time to do that. At this point, it’s highly likely we’re checking. [S&P 500] as low as 3,638, and then it’s just a question of whether we make a new low,” he said. A lot of people are focusing on 3,400 on the S&P 500.”

Strategists say the market will also focus on earnings season, and many expect a shifting reaction as companies begin reporting and reduce future earnings guidance. Earnings begin with the big banks reporting July 14 and 15.

“The only bullish story the market has right now is that it can go up on bad news,” said Redler. “At this point, it’s just a matter of how long this contraction will last. The Fed starts it. They want this.”

Week-by-week calendar

Monday

Fourth of July holiday

Market is closed

Tuesday

10:00 a.m. factory orders

Wednesday

9:00 a.m. New York Fed President John Williams

9:45 a.m. S&P Global services June PMI

10:00am ISM June Service

10:00 a.m. May JOLTS

2:00pm FOMC

Thursday

8:15 am ADP jobs

8:30 a.m. Initial Jobless Claims

8:30 a.m. May trade balance

1:00 p.m., Fed governor Christopher Waller

1:00 pm St. Louis Fed President James Bullard

Friday

Income: WD-40, Levi Strauss

8:30 a.m. New York Fed President John Williams

8:30 a.m. June jobs report

10:00 a.m. May wholesale deals

11:00 a.m. New York Fed President John Williams

3:00pm Consumer Credit May



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