Market Update

• U.S. stocks follow European markets upward. After a strong reversal yesterday, domestic equities are moving higher in early trading. Wednesday’s session saw strong first hour selling; however, the S&P 500 rose throughout the rest of the day to advance 0.54%. A rally in biotech stocks led healthcare up as the top performer, while telecom was the only sector to remain in the red. Overnight, Asian markets were mixed with the Nikkeifalling for the third straight day; but in afternoon trading, European markets are up across the board, boosted by gains in consumer goods stocks. Meanwhile, WTI crude oil is hovering near the $48 level, COMEX gold is sliding lower, and the yield on the 10-year Treasury is back up to 1.40%.

Macro View

• First post-Brexit data point, on new claims. New claims for unemployment fell 16,000 to 254,000 in the week ending July 1, as claims stabilize near 40-year lows after recent distortions. More distortions are upon us now, as the end of the quarter, the end of the school year, and the annual auto plant shutdowns are now likely distorting the data. Claims are down 23,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so clearly there is no recession signal from claims. In sharp contrast to the extremely weak April (+123,000) and May (+38,000) job counts (after the economy consistently created 200,000 jobs per month over the prior 6 years), the recent level of claims continues to point to a solid labor market, but we will continue to watch it closely.

• June ADP employment report suggests a solid labor market; June Employment report due out tomorrow.ADP said that the private sector created +172,000 net new jobs in June, exceeding expectations (+160,000) and accelerating from the upwardly revised 168,000 reading in May. The April, May, and June ADP reports posted an average gain of +163,000, in sharp contrast to what the U.S. Department of Labor’s data showed for April and May (78,000 per month). Although financial markets may not believe this, Federal Reserve Bank (Fed) officials have said job gains in the range of 125-150,000 per month are sufficient to tighten the labor market and push up wages. So even at 172,000, labor market conditions are still tightening. The U.S. Bureau of Labor Statistics will release its June 2016 Employment Situation Report tomorrow, July 8. The consensus is expecting a 180,000 increase in jobs, a +2.7% year-over-year gain in wages, and a 4.8% unemployment rate.

• Layoff announcements declined in June, another sign that the labor market is on solid footing, but announcements remain elevated in the energy sector.There were 38,157 announced job cuts in June 2016, up from 30,157 in May but below the 44,842 in June 2015. Energy layoffs continue to be the big story, accounting for up to one-quarter (~20,000 per month) of all layoffs year to date in 2016. To put that in context, energy jobs only account for 1-2% of overall employment in the U.S. In the past 12 months, there were 629,000 announced layoffs economy-wide, roughly 1200,000 higher than the levels seen in 2012-14, which, taken at face value, suggest some weakening in labor market trends. But 115,000 (or just under 20%) of the 629,000 announced layoffs in the past 12 months came in the energy sector. Although energy prices have stabilized and moved higher in recent months, oil production remains weak, and we continue to expect more layoffs in the energy sector in the coming weeks and months. Outside of energy, the layoff data are consistent with a solid labor market.

• Minutes of the June 15-16, 2016 FOMC meeting released. The Federal Open Market Committee (FOMC)minutes from the June meeting stressed a gradual approach to rate hikes and elevated concern about both slow growth and low inflation. In addition, global financial conditions, which seem to be “Fed speak” for a stronger dollar, were mentioned twice, and have appeared 14 times in the FOMC minutes this year, after making few if any appearances last year. Both the impending Brexit vote and the weak April and May jobs reports were also discussed. We have the Fed raising rates just once more this year. The next FOMC meeting is in late July.

Monitoring the Week Ahead

Thursday

• ADP Employment (Jun)
• Eurozone: European Central Bank Releases Minutes of June Meeting
• Japan: Economy Watchers Survey (Jun)

Friday

• Employment Report (Jun)
• UK: Consumer Confidence (Post Brexit)

Saturday

• NATO Summit in Warsaw
• G-20 Trade Ministers Meeting in China
• China: CPI (Jun)

Click Here for our detailed Weekly Economic Calendar

 

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Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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