Markets creep forward after jobs report assuages recession concerns

MANHATTAN (CN) — Fears of a recession were kept at bay this week as another jobs report showing better-than-expected employment gains helped U.S. markets pull out a winning week to kick off the second half of 2022.

The week’s gains were mild on Wall Street, with the Dow Jones Industrial Average increasing just 242 points for the week, the S&P 500 rising 74 points, and the Nasdaq netting 508 points.

On Friday, the U.S. Bureau of Labor Statistics noted the economy added 372,000 jobs last month, all of it from the private sector and well above the 250,000 jobs many analysts had predicted. Wage growth also increased only 0.3% in June for a total 5.1% increase annually thus far, the third month growth increases have shrunk.

Due to June’s job increases, the three-month average starting in March is at 374,000 jobs gained per month. The gains were pretty consistent among sectors, though the leisure and hospitality sector still remains 1.3 million jobs below the sector’s pre-pandemic high.

Wall Street had a muted reaction to the report, with markets teetering slightly positive and negative throughout the day as investors consider whether it means the Federal Reserve will continue to aggressively raise interest rates. Bond yields again increased sharply Friday morning, with the 10-year Treasury settling at nearly 3.1% by the end of trading.

Analysts, however, cheered the report as a splash of cold water to all the recent recession talk. The strong jobs report “appears to make a mockery of claims the economy is heading into, let alone already in, a recession,” said Andrew Hunter, senior U.S. economist at Capital Economics.

“Overall, today’s report simply means the Fed still has more work to do with regards to policy rates,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “Ultimately, what matters here for investors is not how quickly the Fed hikes rates, but how high they have to go in order to slow the economy.”

There were some soft points in the jobs report, though. The last two jobs reports were revised downward by 74,000 jobs, and the labor participation rate fell 0.1% to hit 62.2%, with the employment-to-population ratio is down to 59.9%. However, the 3.6% unemployment rate is at a record low, giving analysts some hope.

“Despite the setback in labor force participation, we believe conditions for a continued rebound in the labor supply remain in place, with rising wages and inflation likely to push more sidelined workers to re-joining the labor force in coming months,” wrote Oxford Economics analyst Lydia Boussour in an investor’s note.

Experts are now leaning toward the Fed keeping its foot on the gas pedal when it comes to interest rate hikes – with some even pointing out the recently released meeting minutes mentioned inflation about 90 times while not mentioning the word “recession” at all. However, just how much pressure the Fed puts on the gas pedal is up for debate.

The consensus seems to be at least a 0.5% interest rate hike, but some think a 0.75% rate hike is in the works after it already did so for the first time in nearly 30 years during its June meeting. The current interest rate for the overnight federal funds rate is at 1.5% to 1.75%.

Some think the Fed is determined to increase interest rates by 75 basis points during its next meeting. “The strong number not only keeps the focus on 75bps in July, which now seems a done deal but also means we could see a similar move of 75bps in September, especially if we get a strong [core inflation] number next week,” Michael Hewson at CMC Markets wrote in an investor’s note.

Based on the last meeting’s minutes, during which all but one participant supported a rate hike of 75 basis points, the Fed certainly seems ready to keep the 0.75% rate hikes coming. Indeed, the minutes noted that recent inflation data point to “a considerable probability of 7 basis point moves at both the June and July meetings.”

However, the minutes also hint the Fed may pause its interest rate hikes later this year. “Participants noted that, with the federal funds rate expected to be near or above estimates of its longer-run level later this year, the committee would then be well positioned to determine the appropriate pace of further policy firming and the extent to which economic developments warranted policy adjustments,” the minutes read.

The path forward may be additional 50-basis point increases during the Fed’s fall meetings, with a possible 25-basis point hike at its last meeting for the year.

The Fed meets again from July 26 to 27.

Follow @NickRummell

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