Category: Economy

Key Factors Shaping Q3 2024’s Financial Markets

Posted on by slightbourne@noblecapitalmarkets.com

As we enter the third quarter of 2024, investors are turning their attention to the upcoming June jobs report, which will provide crucial insights into the state of the U.S. labor market. This report, set to be released on Friday, July 5, is expected to show a cooling but still resilient job market, with forecasts predicting 188,000 nonfarm payroll jobs added and unemployment holding steady at 4%.

The jobs report comes at a pivotal time, as the stock market has seen impressive gains in the first half of the year. The S&P 500 is up 14.5%, while the tech-heavy Nasdaq Composite has surged over 18%. The Dow Jones Industrial Average, however, has posted a more modest gain of 3.8%.

These gains have been largely driven by a handful of tech giants, with over two-thirds of the S&P 500’s increase attributed to just seven companies: Nvidia, Apple, Alphabet, Microsoft, Amazon, Meta, and Broadcom. Notably, Nvidia alone accounts for nearly one-third of these gains, underscoring the outsized impact of the AI boom on market performance.

This concentration of gains has sparked debate among market watchers about whether the rally will broaden to other sectors in the second half of the year. So far, only two sectors – Communications Services and Information Technology – have outperformed the S&P 500, both up more than 18%.

The dominance of tech companies is expected to continue into the second quarter earnings season. The six largest tech firms (Nvidia, Apple, Alphabet, Microsoft, Amazon, and Meta) are projected to grow their earnings by an impressive 31.7%, far outpacing the overall S&P 500’s expected growth of 7.8%.

This stark contrast in earnings growth has helped fuel the ongoing rally in tech stocks. Since March 31, while the S&P 500’s earnings estimates have dipped by just 0.1% (compared to a typical 3.3% decline), estimates for the top six tech companies have actually been revised upward by 3.9%.

As we move into the third quarter, investors and analysts will be closely watching whether these tech behemoths can maintain their stellar performance. The sustainability of their earnings growth remains a key question that could significantly impact market direction in the coming months.

Meanwhile, the broader economic picture continues to evolve. Recent inflation data has shown positive trends, with prices increasing at their slowest pace since March 2021. This development, combined with signs of a gradual cooling in the labor market, has led some economists to argue that the Federal Reserve should consider cutting interest rates sooner rather than later.

However, the Fed has maintained its restrictive stance on interest rates, focusing on bringing inflation down to its 2% target. The upcoming jobs report and other economic indicators will be crucial in shaping the Fed’s future policy decisions.

As we head into a holiday-shortened trading week, with markets closing early on July 3 and remaining closed on July 4 for Independence Day, investors will have limited time to digest the latest economic data. The week will see releases on manufacturing and services sector activity, job openings, and private payrolls, culminating in Friday’s all-important jobs report.

In conclusion, as we begin Q3 2024, the market remains buoyant but highly concentrated in the tech sector. The interplay between economic data, Fed policy, and the performance of tech giants will likely define the market’s trajectory in the coming months, with all eyes on whether the rally can broaden beyond the current narrow leadership.

U.S. Economy Shows Signs of Softening, but Remains Resilient

Posted on by slightbourne@noblecapitalmarkets.com

As we approach the midpoint of 2024, the U.S. economy continues to navigate choppy waters, displaying both signs of resilience and indications of a gradual slowdown. Recent economic data paints a picture of an economy in transition, with implications for investors across various sectors. The latest unemployment figures offer a nuanced view of the job market. While initial jobless claims dipped by 6,000 to 233,000 in the week ending June 22, the number of Americans receiving ongoing unemployment benefits climbed to 1.839 million – the highest level since November 2021. This uptick in continuing claims suggests that while layoffs remain relatively low, job seekers may be facing increased difficulty in finding new employment. The unemployment rate ticked up to 4.0% in May, marking its first increase since January 2022. However, economists caution against overinterpreting this rise, noting that the increase is concentrated among specific demographics and industries rather than indicating a broad-based weakening of the labor market.

The Commerce Department recently revised its estimate of first-quarter GDP growth upward to 1.4% annualized, a slight improvement from the previous 1.3% estimate but still significantly lower than the robust 3.4% growth seen in the fourth quarter of 2022. While a modest acceleration is expected in the second quarter, analysts project growth to remain below 2.0%. This slowdown in economic expansion reflects the cumulative impact of the Federal Reserve’s aggressive interest rate hikes, which have risen by 525 basis points since 2022 in an effort to combat inflation. The central bank has maintained its benchmark rate at 5.25%-5.50% since July 2023, but market expectations are now shifting towards potential rate cuts, with many anticipating the first reduction as soon as September 2024.

May’s economic data revealed some concerning trends in business spending and international trade. Orders for non-defense capital goods (excluding aircraft), a key indicator of business investment, fell by 0.6% in May. This decline suggests that higher borrowing costs and softening demand are beginning to impact companies’ willingness to invest in new equipment and technologies. On the trade front, the goods deficit widened by 2.7% to $100.6 billion in May, driven by a 2.7% drop in exports. This development could potentially act as a drag on second-quarter GDP growth, adding another layer of complexity to the economic outlook.

For investors, these economic indicators present a mixed bag of challenges and opportunities. The softening labor market and slowing economic growth may pressure consumer-focused sectors, while the potential for interest rate cuts later in the year could provide a boost to rate-sensitive industries such as real estate and utilities. The decline in business spending bears watching, particularly for those invested in industrial and technology sectors. Companies that provide essential equipment and services may face headwinds in the near term as businesses become more cautious with their capital expenditures. Meanwhile, the widening trade deficit could have implications for multinational corporations and currency markets. Investors may want to keep a close eye on companies with significant overseas exposure and consider the potential impacts of currency fluctuations on their portfolios.

As we move into the second half of 2024, the U.S. economy appears to be walking a tightrope between continued growth and potential contraction. While some economists believe we’re on track for a “soft landing,” investors should remain vigilant and diversified. The coming months will be crucial in determining whether the current slowdown stabilizes or accelerates. Key factors to watch include the Federal Reserve’s policy decisions, inflation trends, and global economic developments. As always, a well-informed and adaptable investment strategy will be essential in navigating these uncertain economic waters. The complex interplay of labor market dynamics, GDP growth, business investment, and international trade will continue to shape the economic landscape, offering both challenges and opportunities for astute investors in the months ahead.

Economic Headwinds: Labor Market Softens and Housing Sector Cools

Posted on by slightbourne@noblecapitalmarkets.com

Recent economic reports suggest that the U.S. economy may be facing increasing headwinds, with signs of softening in both the labor market and housing sector. These indicators point to a moderation in economic activity for the second quarter of 2024, potentially setting the stage for a shift in Federal Reserve policy later this year.

The Labor Department reported that initial jobless claims for the week ended June 15 fell by 5,000 to a seasonally adjusted 238,000. While this represents a slight improvement from the previous week’s 10-month high, it only partially reverses the recent upward trend. More tellingly, the four-week moving average of claims, which smooths out weekly volatility, rose to 232,750 – the highest level since mid-September 2023.

Adding to concerns about the labor market, continuing unemployment claims edged up to 1.828 million for the week ending June 8, marking the highest level since January. This uptick in ongoing claims could indicate that laid-off workers are facing increased difficulties in finding new employment, a potential red flag for overall job market health.

The unemployment rate, which rose to 4.0% in May for the first time since January 2022, further underscores the gradual cooling of the labor market. While job growth did accelerate in May, some economists caution that this may overstate the true robustness of employment conditions.

Turning to the housing sector, the news is equally sobering. The Commerce Department reported that housing starts plummeted 5.5% in May to a seasonally adjusted annual rate of 1.277 million units – the lowest level since June 2020. This decline was even more pronounced in the critical single-family housing segment, which saw starts fall 5.2% to a rate of 982,000 units, the lowest since October 2023.

The slowdown in housing construction is mirrored by a drop in building permits, often seen as a leading indicator for future construction activity. Permits for new housing projects tumbled 3.8% in May, again reaching levels not seen since June 2020. This decline in both current and future building activity paints a concerning picture for the housing market’s near-term prospects.

Several factors appear to be contributing to the housing sector’s struggles. Mortgage rates have seen significant volatility, with the average 30-year fixed rate reaching a six-month high of 7.22% in early May before retreating slightly. These elevated borrowing costs are keeping many potential buyers on the sidelines, as noted by the National Association of Home Builders, which reported that homebuilder confidence hit a six-month low in June.

The combination of a softening labor market and a cooling housing sector has led some economists to revise their growth projections downward. Goldman Sachs, for instance, has pared back its GDP growth estimate for the second quarter to a 1.9% annualized rate, down from an earlier projection of 2.0%.

These economic indicators are likely to factor heavily into the Federal Reserve’s decision-making process in the coming months. Despite the Fed’s more hawkish stance at its recent meeting, where officials projected just one quarter-point rate cut for this year, financial markets are anticipating the possibility of multiple rate cuts. The latest data may bolster the case for monetary easing, with some economists now seeing the potential for an initial rate cut as early as September.

Many economists believe that the soft activity and labor market data reinforce expectations for the Fed to begin cutting interest rates in the coming months, with potential cuts in September and December being discussed.

While the U.S. economy continues to show resilience in many areas, the emerging signs of moderation in both the labor and housing markets suggest that the impact of higher interest rates is beginning to be felt more broadly. As we move into the second half of 2024, all eyes will be on incoming economic data and the Federal Reserve’s response to these evolving conditions. The delicate balance between managing inflation and supporting economic growth remains a key challenge for policymakers in the months ahead.

The confluence of a cooling job market and a struggling housing sector paints a picture of an economy at a crossroads. As these trends continue to develop, they will likely play a crucial role in shaping both economic policy and market expectations for the remainder of the year and beyond.

Wall Street Euphoria Pushes S&P 500 to New Peaks

Posted on by slightbourne@noblecapitalmarkets.com

While each successive record tends to cement Wall Street’s unbridled bullishness, a growing chorus of skeptics warns the frenzied march higher is getting ahead of itself. Hedge funds have started dialing back their market exposure, with Goldman Sachs Prime Services reporting the biggest drop in leverage since early 2022 as the “smart money” takes a more defensive stance.

Yet for every doubting voice, there seems to be an emboldened stock market bull ready to revise their targets even higher. On Monday, Evercore’s Julian Emanuel raised his year-end S&P 500 forecast to 6,000 – the highest among major Wall Street strategists and implying over 10% further upside from current levels.

So what exactly is fueling the relentless melt-up at a time when economic growth shows signs of moderating? A convergence of factors led by receding inflation fears, the prospect of Fed rate cuts, and frothy speculation around disruptive themes like artificial intelligence.

The easing of price pressures has been a driving force. After peaking above 9% in 2023, economists project inflation will continue moderating towards the Fed’s 2% target amid cooling consumer demand. That’s allowing traders to bet the central bank will start reversing its aggressive rate hiking campaign as soon as September, providing a powerful tailwind for equities.

“Improving inflation trends would lead to a more constructive policy outlook, which should be a tailwind for equities and fixed income,” said researchers at Glenmede Investment Management. “A September rate cut is likely on the table.”

Of course, Fed officials have pushed back on expectations for steep rate cuts, reiterating that rates will likely remain restrictive for a while. But the Fed Fund futures market remains convinced of looser policy by year-end.

Fueling that enthusiasm is the burning zeal around cutting-edge themes like artificial intelligence and generative AI. The powerful rallies in mega-cap tech leaders have turbo-charged indexes like the Nasdaq-100, which is up nearly 35% year-to-date. Firms from Microsoft to Google parent Alphabet have soared amid optimism their AI investments will mint a new era of computing.

At the same time, shrinking bond yields have eased financial conditions, supporting equity valuations – especially in rate-sensitive growth sectors. The 10-year Treasury yield dipped back below 4.3% on Monday, extending a sizeable retreat from March’s highs above 4.6% amid rising hopes of a soft economic landing.

Underpinning the rally is the notion that some $6 trillion sitting in low-risk money market funds could get funneled back into stocks, emboldening dip-buyers to chase the market ever higher. While skeptics doubt the “great rotation” thesis, any whiff of outflows from cash could spark bouts of frenzied buying from investors piling in for fear of missing out on further gains.

To be sure, the sheer volume of record highs smashed in 2024 has become as much a sentiment indicator as a sign of genuine market strength. Measures of market breadth have steadily deteriorated, even as the large-cap indexes scale new peaks. That signals an increasingly narrow group of stocks doing the heavy lifting – a potential warning signal for traders watching for an impending reversal.

Still, with Wall Street’s biggest brains rapidly marking up their forecasts, Main Street investors have little incentive to fight the Fed-enabled melt-up. Whether the rally proves durable could ultimately hinge on earnings holding up and the central bank’s policy guidance around rates. For now, the path of least resistance appears to remain solidly higher.

Nasdaq and S&P 500 Slip from Record Highs

Posted on by slightbourne@noblecapitalmarkets.com

June 14, 2024, marked a notable shift in the U.S. stock market as major indexes pulled back from record highs. Investors engaged in profit-taking while considering the implications of a hawkish Federal Reserve and signs of a slowing economy. This article delves into the key factors influencing the market’s performance and the broader economic context.

After a week of record-setting highs, U.S. stock indexes experienced their first session of decline. The Nasdaq Composite (.IXIC) and the S&P 500 (.SPX) fell from their peaks, while the Dow Jones Industrial Average (.DJI) also retreated. By midday, the Dow was down 126.96 points (0.33%) to 38,520.14, the S&P 500 dropped 16.29 points (0.30%) to 5,417.45, and the Nasdaq decreased 30.57 points (0.17%) to 17,636.99.

Adding to market uncertainty, the Federal Reserve’s recent projections suggested a more conservative approach to rate cuts than previously anticipated. The Fed’s updated forecast scaled back expectations from three rate cuts this year to just one. This cautious stance contrasted with market expectations, which, according to the CME’s FedWatch tool, saw a more than 70% chance of a rate cut in September and two cuts by year-end.

Cleveland Fed President Loretta Mester commented on the positive trend of lowering inflation, but this did little to alleviate concerns about the Fed’s restrained policy easing.

Economic data further complicated the market’s outlook. The University of Michigan’s preliminary Consumer Sentiment Index fell to 65.6 in June, significantly below expectations. This decline highlighted ongoing concerns about inflation and economic stability, contributing to the overall negative sentiment in the market.

The downturn was broad-based, with nine of the 11 S&P 500 sectors experiencing declines. Industrials led the losses with a 1.6% drop, while the economically sensitive small-cap Russell 2000 index lost 1.8%. Despite the general downturn, a few stocks stood out:

  • Adobe (ADBE.O): Adobe shares surged 14.5%, marking the company’s largest one-day gain in four years. The jump came after Adobe raised its annual revenue forecast, driven by robust demand for its AI-powered software, which helped mitigate losses on the Nasdaq.
  • Broadcom (AVGO.O): Broadcom continued its positive streak with a 1.7% rise following an upbeat forecast and the announcement of a 10-for-one stock split.
  • Arm Holdings (ARM.O): Shares of Arm Holdings rose 2.2% after news that the company would join the Nasdaq 100 index, replacing Sirius XM (SIRI.O), which slipped 0.8%.

The market’s optimism earlier in the week was driven by hopes of easing Fed policy and the strength of megacap stocks. Both the S&P 500 and the Nasdaq were on track for their seventh week of gains out of eight. However, the possibility of a second-half recession, which could force the Fed to cut rates more significantly, remains a concern.

Ross Mayfield, investment strategy analyst at Baird, noted that the market is pricing in a small but significant probability of a recession in the second half of the year.

A Bank of America Global Research report indicated that U.S. value stock funds saw $2.6 billion in outflows, while U.S. growth stock funds attracted $1.8 billion in inflows for the week ending Wednesday. This shift underscores investor preference for growth stocks amid economic uncertainties.

On the NYSE, declining issues outnumbered advancers by a 3.34-to-1 ratio, while on the Nasdaq, the ratio was 2.77-to-1. The S&P index recorded eight new 52-week highs and 16 new lows, while the Nasdaq saw 19 new highs and 149 new lows.

The retreat in U.S. stock indexes reflects a complex interplay of profit-taking, hawkish Fed projections, and cooling economic data. While there is optimism about potential future rate cuts, ongoing concerns about inflation and consumer sentiment continue to weigh on investor confidence. As the year progresses, market participants will closely monitor the Federal Reserve’s actions and economic indicators to gauge the trajectory of the economy and financial markets.

Homebuyers Face Ongoing Affordability Challenges Despite Slight Mortgage Rate Dip

Posted on by slightbourne@noblecapitalmarkets.com

The mortgage market has seen a slight reprieve this week, with average rates on a 30-year fixed mortgage dipping just below 7%. According to Freddie Mac, the average rate has decreased to 6.95% from 6.99% the previous week. However, for many prospective homebuyers, this minor drop may not be enough to make a significant difference in affordability.

Freddie Mac’s report on Thursday highlights a small but noteworthy dip in mortgage rates. A separate measure tracking daily averages by Mortgage News Daily shows fluctuations between 6.97% and 7.17% over the past week. Despite this slight decline, the rates remain relatively high compared to historical lows, creating challenges for budget-conscious homebuyers.

The Federal Reserve’s policies continue to play a crucial role in shaping mortgage rates. Recently, the Fed decided to hold the benchmark rates steady at 5.25% to 5.50%, signaling only one rate cut for the rest of the year. This decision suggests that any substantial decline in mortgage rates is unlikely in the near future. The Fed’s cautious approach indicates that significant rate drops might not occur until well into 2025.

A recent study indicates that a majority of homebuyers, particularly first-time buyers, need significantly lower rates before they feel confident returning to the market. Ralph McLaughlin, Realtor.com’s senior economist, emphasizes that for inventory-constrained buyers, current mortgage trends will likely maintain the “mortgage rate lock-in effect.” This effect, where homeowners are reluctant to sell and buy new homes at higher rates, is expected to persist until at least the end of the year.

The latest inflation data has shown signs of moderation, with the core Consumer Price Index (CPI) excluding food and energy costs, climbing just 0.2% monthly in May—the lowest since last June. Overall inflation has decelerated year-over-year compared to April. While this news initially caused a dip in mortgage rates, the Fed’s subsequent announcement to hold rates steady tempered this effect. The Fed now projects one rate cut for the rest of the year, a reduction from previous expectations.

Fannie Mae’s homebuyer sentiment survey from May reveals that only one in four Americans expect mortgage rates to decrease over the next 12 months. In contrast, more than 30% of respondents anticipate that rates will rise. This sentiment has led to a new low in consumer confidence, driven by the overall lack of purchase affordability.

Despite current challenges, there is a glimmer of hope on the horizon for homebuyers. Economists at Bank of America Global Research predict multiple rate cuts over the next 24 months—four in 2025 and two in 2026. These cuts, in increments of 25 basis points, could bring rates down to between 3.50% and 3.75% by 2026. This long-term outlook provides a potential path to more affordable mortgage rates, but significant declines in the short term remain unlikely.

Last week saw a brief surge in mortgage application volume, increasing by 16% according to the Mortgage Bankers Association. This surge was primarily driven by a short-lived drop in daily rates, which hovered near 7%. New mortgage applications increased by 9%, though they remain 12% lower than the same week last year. Refinancing activity also saw a notable increase of 28% week-over-week, particularly among VA borrowers who took advantage of the lower rates.

At the current average rate of 6.95%, a homebuyer would pay approximately $1,600 monthly on a $300,000 home with a 20% down payment, according to the Yahoo Finance mortgage calculator. This cost highlights the ongoing challenge of affordability for many potential buyers.

While the slight dip in mortgage rates below 7% offers a small reprieve for homebuyers, significant declines are still months away. The Federal Reserve’s cautious approach, coupled with persistent inflation concerns, suggests that substantial rate reductions are unlikely until 2025. Homebuyers must navigate these challenges with careful planning and realistic expectations, while keeping an eye on long-term trends that may eventually bring relief.

Inflation Cools in May, Raising Hopes for Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

In a much-needed respite for consumers and the economy, the latest U.S. inflation data showed pricing pressures eased significantly in May. The Consumer Price Index (CPI) remained flat month-over-month and rose just 3.3% annually, according to the Bureau of Labor Statistics report released Wednesday. Both measures came in below economist expectations, marking the lowest monthly headline CPI reading since July 2022.

The lower-than-expected inflation numbers were driven primarily by a decline in energy costs, led by a 3.6% monthly drop in gasoline prices. The overall energy index fell 2% from April to May after rising 1.1% the previous month. On an annual basis, energy prices climbed 3.7%.

Stripping out the volatile food and energy categories, so-called core CPI increased just 0.2% from April, the smallest monthly rise since June 2023. The annual core inflation rate ticked down to 3.4%, moderating from the prior month’s 3.5% gain.

The cooling inflation data arrives at a pivotal time for the Federal Reserve as policymakers weigh their next policy move. Central bank officials have repeatedly stressed their commitment to bringing inflation back down to the 2% target, even at the risk of slower economic growth. The latest CPI print strengthens the case for interest rate cuts in the coming months.

Financial markets reacted positively to the encouraging inflation signals, with the 10-year Treasury yield falling around 12 basis points as traders priced in higher odds of the Fed starting to cut rates as soon as September. According to futures pricing, markets now see a 69% chance of a rate cut at the central bank’s September meeting, up sharply from 53% before the CPI release.

While the overall inflation trajectory is encouraging, some underlying price pressures remain stubbornly high. The shelter index, which includes rents and owners’ equivalent rent, rose 0.4% on the month and is up a stubbornly high 5.4% from a year ago. Persistent shelter inflation has been one of the biggest drivers of elevated core inflation readings over the past year.

Economists expect the housing components of inflation to eventually moderate given the recent rise in rental vacancy rates and slowing home price appreciation. However, the timing of that slowdown remains highly uncertain, keeping a key pillar of inflation risk intact for the time being.

Beyond shelter costs, other indexes that posted monthly increases included medical care services, used vehicle prices, and tuition costs for higher education. In contrast, airline fares, prices for new cars and trucks, communication services fees, recreation expenses and apparel prices all declined from April to May.

Despite the positive inflation signals from the latest CPI report, Federal Reserve officials have cautioned that the path back to 2% price stability will likely encounter bumps along the way. Last week’s stronger-than-expected jobs report reinforced the central bank’s hawkish policy stance, with the labor market adding 272,000 positions in May versus expectations for 180,000. Wage growth also remained elevated at 4.1% annually.

With both low inflation and low unemployment now seemingly achievable, the Federal Reserve will need to carefully navigate its policy path to engineer a so-called “soft landing” without tipping the economy into recession. Many economists expect at least a couple of 25 basis point rate cuts by early 2024 if inflation continues cooling as expected.

For investors, the latest CPI data provides a much-needed burst of optimism into markets that have been weighed down by persistent inflation fears and looming recession risks over the past year. Lower consumer prices should provide some relief for corporate profit margins while also supporting spending among cost-conscious households. However, the key question is whether this downshift in inflation proves durable or merely a temporary reprieve.

The Fed’s ability to deftly manage the competing forces of lowering inflation while sustaining economic growth will be critical for shaping the trajectory of investment portfolios in the months ahead. Keep a close eye on forward inflation indicators like consumer expectations, global supply dynamics, and wage trends to gauge whether this cooling phase proves lasting or short-lived. The high-stakes inflation battle is far from over.

Private Hiring Slows More Than Expected as Labor Market Cools

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market showed further signs of cooling in May as private hiring slowed more than anticipated, according to the latest employment report from payroll processor ADP.

Companies added just 152,000 jobs last month, coming in well below economist projections of a 175,000 increase. It marked the lowest level of monthly job gains since January and a notable deceleration from April’s downwardly revised 188,000 figure.

The ADP report, which captures private payroll changes but not government hiring, suggests the robust labor market demand that has characterized the pandemic recovery is moderating amid higher interest rates, still-elevated inflation, and growing economic uncertainty.

“Job gains and pay growth are slowing going into the second half of the year,” said Nela Richardson, ADP’s chief economist. “The labor market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers.”

A Shift Toward Services
While goods-producing sectors like manufacturing, mining, and construction have driven solid hiring for much of the recovery, last month they contributed only 3,000 net new jobs.

Job creation was instead carried by services industries, led by trade/transportation/utilities with 55,000 new positions. Other strong areas included education/health services (+46,000), construction (+32,000), and other services (+21,000).

However, even within services there were weak spots, including the previously booming leisure/hospitality sector which saw just a 12,000 job gain in May. Professional/business services also posted a decline.

Manufacturers Slashing Payrolls
The report highlighted particular softness in the manufacturing sector, which shed 20,000 jobs last month amid a broader industrial slowdown.

Factories have been cutting payrolls for most of the past 18 months as higher material and energy costs, supply chain disruptions, and softening demand weighed on production. The sector has contracted in seven of the last eight months, according to survey data.

Regional manufacturing indexes have also pointed to slowing activity and employment levels, including the latest readings from the Dallas and Richmond Federal Reserve districts.

Small Businesses Feeling the Pinch
Companies with fewer than 50 employees were disproportionately impacted in May, seeing a net decrease in headcounts. Those with 20-49 workers reduced staffing levels by 36,000.

The pullback at smaller firms underscores how rapidly tightening financial conditions and ebbing consumer demand have started to squeeze profits and required some businesses to adjust their workforce levels.

Annual Pay Growth Steady at 5%
Despite some loss of momentum in overall hiring, the ADP report showed private wage growth stayed on a 5% annual trajectory last month, holding steady at that level for a third consecutive period.

The elevated but moderating pace of pay increases suggests employers are still working to attract and retain staff even as overall job creation starts to wane from its torrid pandemic-era pace.

While a single data point, the ADP release could preview what’s to come from the more comprehensive government nonfarm payrolls report due out Friday. Economists expect that report to show a 190,000 increase in total U.S. payrolls for May, slowing from April’s 253,000 gain.

As borrowing costs continue climbing and spending softens, further hiring deceleration across both goods and services sectors seems likely in the months ahead, though an outright decline remains unlikely based on most economic projections.

Inflation Finally Cools – Here’s the Key Number That Stunned Economists

Posted on by slightbourne@noblecapitalmarkets.com

The latest data from the Bureau of Labor Statistics provided a glimmer of hope in the battle against stubbornly high inflation. The Consumer Price Index (CPI) rose by 0.3% in April compared to the previous month, marking the slowest monthly increase in three months. On an annual basis, consumer prices climbed 3.4%, a slight deceleration from March’s 3.5% rise.

These figures indicate that inflationary pressures may be starting to abate, albeit gradually. The monthly increase came in lower than economists’ forecasts of a 0.4% uptick, while the annual rise matched expectations. After months of persistently elevated inflation, any signs of cooling are welcomed by consumers, businesses, and policymakers alike.

The slight easing of inflation was driven by a moderation in some key components of the CPI basket. Notably, the shelter index, which includes rents and owners’ equivalent rent, experienced a slowdown in its annual growth rate, rising 5.5% year-over-year compared to the previous month’s higher rate. However, shelter costs remained a significant contributor to the monthly increase in core prices, excluding volatile food and energy components.

Speaking of core inflation, it also showed signs of cooling, with prices rising 0.3% month-over-month and 3.6% annually, slightly lower than March’s figures. Both measures met economists’ expectations, providing further evidence that the overall inflationary trend may be moderating.

One area that continued to exert upward pressure on prices was energy costs. The energy index jumped 1.1% in April, matching March’s increase, with gasoline prices rising by 2.8% over the previous month. However, it’s worth noting that energy prices can be volatile and subject to fluctuations in global markets and geopolitical factors.

On the other hand, food prices remained relatively stable, with the food index increasing by 2.2% annually but remaining flat from March to April. Within this category, prices for food at home decreased by 0.2%, while prices for food away from home rose by 0.3%.

The April inflation report had a positive impact on financial markets, with investors anticipating a potential easing of monetary policy by the Federal Reserve later this year. The 10-year Treasury yield fell about 6 basis points, and markets began pricing in a roughly 53% chance of the Fed cutting rates at its September meeting, up from about 45% the previous month.

While the April data provided some respite from the relentless climb in consumer prices, it’s important to remember that inflation remains well above the Fed’s 2% target. The battle against inflation is far from over, and the central bank has reiterated its commitment to maintaining tight monetary policy until price stability is firmly established.

As markets and consumers digest the latest inflation report, all eyes will be on the Fed’s upcoming policy meetings and any potential shifts in their stance. A sustained cooling of inflationary pressures could pave the way for more accommodative monetary policy, but any resurgence in price growth could prompt further tightening measures.

In the meantime, businesses and households alike will continue to grapple with the effects of elevated inflation, adjusting their spending and investment decisions accordingly. The April data offers a glimmer of hope, but the road to price stability remains long and arduous.

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Jamie Dimon’s Candid Warning on U.S. Fiscal Deficit

Posted on by slightbourne@noblecapitalmarkets.com

In a recent interview, Jamie Dimon, the CEO of JPMorgan Chase, issued a stark warning to the United States regarding its fiscal deficit. Dimon’s stern warning has significant ramifications, not only for policymakers but also for investors closely monitoring economic trends and government policies that can influence market dynamics and investment strategies.

Dimon’s primary concern revolves around the rapid escalation of the fiscal deficit, which currently stands at a staggering 6% of the nation’s GDP. This surge is largely attributable to the extensive measures implemented during and after the COVID-19 pandemic, including interest rate hikes, tax cuts, and massive stimulus programs. While these actions were intended to buoy the economy during turbulent times, Dimon cautions that their long-term consequences, if not counterbalanced by fiscal discipline, could be detrimental.

A prominent issue highlighted by Dimon is the potential impact on inflation. Unchecked deficit spending can fuel higher inflation rates, eroding the purchasing power of investors and consumers alike. Inflation trends are closely watched by investors, as they can influence interest rates, asset prices, and overall investment strategies. Moreover, a ballooning deficit can signal underlying economic imbalances, potentially necessitating corrective measures in the future that could disrupt investment portfolios.

Moreover, Dimon’s remarks shed light on the broader economic outlook. A ballooning deficit can signal underlying economic imbalances and may necessitate corrective measures in the future. For investors, this underscores the importance of staying informed about macroeconomic indicators and government fiscal policies that can shape investment opportunities and risks.

Dimon’s call for addressing the deficit resonates with the broader theme of fiscal responsibility in investment strategies. Investors often seek opportunities in sectors or assets less vulnerable to fiscal uncertainties or inflationary pressures. Diversification across asset classes and regions can also mitigate risks associated with policy changes. Furthermore, Dimon’s commentary underscores the interplay between government policies and market dynamics, as policy decisions, such as deficit reduction efforts, can shape market sentiment, investor confidence, and long-term economic stability.

Furthermore, Dimon’s commentary touches on the relationship between government policies and market dynamics. Investors are mindful of how policy decisions, such as deficit reduction efforts, can influence market sentiment, investor confidence, and long-term economic stability. Understanding these interconnections is crucial for making informed investment decisions.

Beyond fiscal matters, Dimon’s advocacy for respectful dialogue and understanding across political divides is noteworthy. Political stability and consensus on economic policies can contribute to a favorable investment climate. Investors value predictability and clarity in policy frameworks, as they provide a foundation for long-term planning and investment allocation.

In conclusion, Jamie Dimon’s warning regarding the U.S. fiscal deficit carries significant implications for investors. It underscores the importance of fiscal responsibility, the potential impact on inflation and market dynamics, and the value of informed decision-making in navigating economic uncertainties. As investors evaluate opportunities and risks, staying attuned to developments in fiscal policy and economic trends will remain paramount in shaping investment strategies.

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Inflation Just Dropped a Massive Hint About the Fed’s Next Move

Posted on by slightbourne@noblecapitalmarkets.com

The major U.S. stock indexes inched up on Tuesday as investors digested mixed producer inflation data and turned their focus to the much-anticipated consumer price index report due out on Wednesday.

The producer price index (PPI) for April showed prices paid by businesses for inputs and supplies increased 0.2% from the prior month, slightly above economists’ expectations of 0.1%. On an annual basis, PPI rose 2.3%, decelerating from March’s 2.7% pace but still higher than forecasts.

The “hot” PPI print caused traders to dial back bets on an interest rate cut from the Federal Reserve at its September meeting. Fed funds futures showed only a 48% implied probability of a 25 basis point rate cut in September, down from around 60% before the report.

Speaking at a banking event in Amsterdam, Fed Chair Jerome Powell characterized the PPI report as more “mixed” than concerning since revisions showed prior months’ data was not as hot as initially reported. He reiterated that he does not expect the Fed’s next move to be a rate hike, based on the incoming economic data.

“My confidence [that inflation will fall] is not as high as it was…but it is more likely we hold the policy rate where it is [than raise rates further],” Powell stated.

Investors are now eagerly awaiting Wednesday’s consumer price index data as it will provide critical signals on whether upside inflation surprises in Q1 were just temporary blips or indicative of a more worrying trend.

Consensus estimates project headline CPI cooled to 5.5% year-over-year in April, down from 5.6% in March. Core CPI, which strips out volatile food and energy prices, is expected to moderate slightly to 5.5% from 5.6%.

If CPI comes in hotter than projected, it would solidify expectations that the Fed will likely forego rate cuts for several more months as it prioritizes restoring price stability over promoting further economic growth.

Conversely, cooler-than-forecast inflation could reinforce the narrative of slowing price pressures and clear the path for the Fed to start cutting rates as soon as June or July to provide a buffer against a potential economic downturn.

The benchmark S&P 500 index closed up 0.18% on Tuesday, while the tech-heavy Nasdaq gained 0.43%. Trading was choppy as investors bided their time ahead of the CPI release.

Market focus has intensified around each new inflation report in recent months as investors attempt to gauge when the Fed might pivot from its aggressive rate hike campaign of the past year.

With inflation still running well above the Fed’s 2% target and the labor market remaining resilient, most economists expect the central bank will need to keep rates elevated for some time to restore price stability. But the timing and magnitude of any forthcoming rate cuts is still hotly debated on Wall Street.

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Jobs Market Losing Steam? Spike in US Jobless Claims Rattles Investors

Posted on by slightbourne@noblecapitalmarkets.com

The long-standing workers’ job market may finally be letting off some steam, if the latest U.S. jobless claims numbers are any indication. Last week’s substantial jump in Americans filing for unemployment benefits – the largest increase in nearly four months – has investors and economists reassessing the trajectory of the labor market’s exceptional tightness.

According to the Labor Department report released Thursday, initial jobless claims soared by 22,000 to 231,000 for the week ending May 4th. This elevated the weekly figure to its highest level since late August 2022, suggesting some mounting cracks in the seemingly impenetrable jobs environment.

The unexpected spike in layoffs comes on the heels of April’s underwhelming employment report that showed the U.S. economy adding the fewest jobs in six months. Couple that with a sharp drop in job openings in March to a three-year low, and the once red-hot labor market certainly appears to be rapidly losing its sizzle.

For investors, this emerging cooldown could have far-reaching implications across asset classes and policy expectations. On Wall Street, the jobless claims data fanned concerns that consumer spending – the lifeblood of the American economy – could take a hit if sustained labor market deterioration sets in. The major stock indexes whipsawed in reaction, with growth-sensitive sectors like technology bearing the brunt of the selling.

The prospect of easing labor pressures and fading wage inflation boosted demand for U.S. government bonds. Lower rates in a potentially weakening economy proved a boon for fixed-income assets. The 10-year Treasury yield, which influences borrowing costs on everything from mortgages to business loans, retreated from recent highs.

Perhaps the biggest market reverberations were felt across interest rate futures. Traders scrambled to raise bets on not just one, but potentially two interest rate cuts from the Federal Reserve before the end of 2023. Just last week, the central bank defiantly left rates untouched at their highest levels since 2007 amid still-elevated inflationary pressures. But ebbing labor market vigor could tip the scales for policymakers anxious to support economic growth.

Central bankers will need to see more definitive evidence that employment conditions have truly turned before making any dovish policy pivots. For now, many economists ascribed the jump in jobless claims to potential seasonal volatility around spring breaks and holidays distorting the data. Applications tend to be especially noisy this time of year due to temporary school hiring and layoffs.

However, a growing chorus of business surveys and corporate guidance has been flagging ebbing labor demand in recent weeks. Cracks have emerged in previously ravenous hiring appetites across industries from tech and finance to manufacturing as higher borrowing costs weigh on spending and investment plans.

That long-awaited moderation could finally provide the Federal Reserve some relief in its battle against stubbornly high inflation. A rebalancing in supply and demand for labor – with more available workers and fewer vacancies – should ease upward pressures on wages and prices over time.

For businesses and households, some softening in the jobs market could sting in the form of lower income prospects. But restoration of more normal churn should help alleviate some of the extreme tightness that has led to crippling labor shortages and surging employment costs in recent years.

Whether this emerging pivot toward a more sustainable labor environment persists will be a critical factor driving both economic performance and monetary policy in the months ahead. The jobless claims surprise has raised the stakes, and all eyes will remain fixated on any further signs of fractures in what has been one of the most durable pillars of the pandemic recovery so far.

Employment Slump: US Adds Fewest Jobs in Six Months, Jobless Rate Edges Up

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market is finally starting to feel the chill from the Federal Reserve’s aggressive interest rate hikes over the past year. April’s employment report revealed clear signs that robust hiring and rapid wage growth are cooling in a shift that could allow central bankers to eventually take their foot off the brake.

Employers scaled back hiring last month, adding just 175,000 workers to payrolls – the smallest increase since October and a notable deceleration from the blazing 269,000 average pace over the prior three months. The unemployment rate ticked higher to 3.9% as job losses spread across construction, leisure/hospitality and government roles.

Perhaps most crucially for the inflation fighters at the Fed, the growth in workers’ hourly earnings also downshifted. Wages rose just 0.2% from March and 3.9% from a year earlier, the slowest annual pace in nearly three years. A marked drop in aggregate weekly payrolls, reflecting weaker employment, hours worked and earnings, could presage a softening in consumer spending ahead.

“We’re finally seeing clear signs that the labor market pump is losing some vapor after getting supercharged last year,” said Ryan Sweet, chief economist at Oxford Economics. “The Fed’s rate hikes have been slow artillery, but they eventually found their target by making it more expensive for companies to borrow, hire and expand payrolls.”

For Federal Reserve Chair Jerome Powell and his colleagues, evidence that overheated labor conditions are defusing should be welcome news. Officials have been adamant that wage growth running north of 3.5% annually is incompatible with bringing inflation back down to their 2% target range. With the latest print under 4% alongside a higher jobless rate, some cooling appears underway.

Still, policymakers will want to see these trends continue and gain momentum over the next few months before considering any pause or pivot from their inflation-fighting campaign. Powell reiterated that allowing the labor market to re-rebalance after an unprecedented hiring frenzy likely requires further moderation in job and wage growth.

“This is just a first step in that process – we are not at a point where the committee could be confidence we are on the sustained downward path we need to see,” Powell said in a press conference after the Fed’s latest rate hold. “We don’t want just a temporary blip.”

Within the details, the latest report offered some signals that could extend the moderating momentum. Job losses spread across multiple interest rate-sensitive sectors, including housing-related construction roles. The number of temporary workers on payrolls declined for the first time since mid-2021.

And while the labor force participation rate was unchanged, the slice of Americans aged 25-54 who either have a job or are looking for one hit 83.5%, the highest since 2003. If that uptrend in prime-age engagement persists, it could help further restrain wage pressures by expanding labor supply.

Of course, the path ahead is unlikely to be smooth. Many companies are still struggling to recruit and retain talented workers in certain fields, which could keep wage pressures elevated in pockets of the economy. And any resilient consumer spending could stoke demand for labor down the line.

But for now, April’s figures suggest the much-anticipated pivot towards calmer labor market conditions may have finally arrived. The Fed will be watching closely to see if what has been a searing-hot job scene can transition to a more manageable lukewarm trend that realigns with its price stability goals. The first cracks in overheated labor demand are emerging.