July Employment Figures Defy Doom and Gloom Forecasts
US employment data has beaten the most optimistic estimates, with a total of 528,000 jobs created vs. the anticipated 250,000 Bloomberg consensus figure. The knock-on effect is that the odds of the Fed issuing a 75 basis point rate hike have rocketed from 35% to over 70%, according to CME data. The news had an impact on the markets, with technology stocks falling while banks saw strong demand.
The latest employment data out of the US has exceeded even the most optimistic economist estimates by a long shot. In fact, it has more than doubled some estimates, creating 528,000 jobs in July, whereas the Bloomberg consensus has previously anticipated 250,000. Moreover, the June balance was revised up to 398,000 (previously estimated 372,000).
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Drop in Unemployment Increases Odds of Rate Hike
Consequently, unemployment fell to 3.5%, whereas the market had expected it to remain stable at 3.6%. And all this amidst a month-on-month increase in the average hourly wage of 0.5%, and by 5.2% over one year. Analysts were predicting a slowdown, with the estimated figure sitting at 4.9%.
Of course, these figures theoretically rule out the possibility of us being in a recession. They also leave the field open for the Federal Reserve to continue its fight against inflation through monetary tightening.
Now, according to the CME Group’s FedWatch tool (which is based on Fed funds futures contracts), a September rate hike of 75 basis points is now thought to have a 70% chance of materializing. For contrast, the probability was estimated at just 34% the day before.
Michael Pearce, senior US economist at Capital Economics said, ” the unexpected acceleration of job creation in July, combined with the continued decline in the unemployment rate and the re-emergence of wage pressures, make a mockery of claims that the economy is on the verge of recession. This strengthens the chances of another 75 basis point hike in September, although the outcome will depend more on the evolution of the next two consumer price statistics.”
In response to the news, the Cac 40 fell 0.38% to 6,488.63 on a volume of 1.49 billion euros. Nonetheless, the index is still on its way to closing out a fifth consecutive weekly rise. And if it does, it would be the longest since November 2021. Meanwhile, in New York, the Dow Jones lost 0.11% and the Nasdaq Composite 0.54%.
Employment Data Is Just One Part: Inflation Figures to Follow
The Fed clearly will determine future rate hikes based on how a broad basket of economic indicators evolves. So while those concerning employment play a central role, others like inflation data do, too. On that front, data on consumer prices for July will be released next Wednesday, followed the next day by developments in producer prices.
On the bond market, 10-year US bond yields tightened by 14 basis points to 2.232%, and 2-year maturity yields traded at 3.1971%, increasing the yield spread to over 40 basis points, which is the sharpest curve inversion since 2000.
Market Reactions to Employment Figures and Expected Rate Hike
Naturally, with the cost of money affecting technology stocks significantly, we’re seeing decreased demand for them in the markets, whereas banks remain in strong demand. S TMicroelectronics lost 2% and Teleperformance 5.5%, while BNP Paribas, Crédit Agricole and Société Générale gained 1.1%, 2.6% and 0.7% respectively.
Publicis fell 2.9% in response to forecasts the WPP deemed to be disappointing. And while the British group did manage to beat its revenue growth forecasts for the year, the margin forecast “could be perceived by the market as a slight disappointment,” according to a Goldman Sachs report.
Elsewhere, Rothschild & Co lost 5.7%, and the investment bank is expected to tread cautiously for the coming year or so, particularly in the mergers and acquisitions market. The firm reported H1 earnings of 3.43 euros per share against 4.78 from the same period last year.
(Featured image by Clem Onojeghuo via Unsplash)
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First published in Les Echos: Investir, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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