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By Brian
Hershberg | Friday, July 8 Dazed
and Confused. Major U.S.
indexes closed mixed in an up-and-down session Friday, as investors struggled
to make sense of what on their face appear to be strong jobs numbers—and what
they mean as it pertains to recession, inflation, and the aggressiveness of Federal
Reserve policy tightening. First, let’s unpack the jobs report. Here’s Barron’s
economics reporter Megan Cassella on the
unexpectedly robust reading: The economy added 372,000
jobs in June—far above consensus expectations of 250,000—and the unemployment
rate held steady at 3.6% in May for the fourth straight month, the Labor
Department said Friday. That should dampen rampant fears that
a recession is imminent, given just how many Americans are
receiving paychecks and how many employers are continuing to hire. But the labor market’s continued strength
will do little to deter the Federal Reserve from staying on its aggressive
monetary-policy tightening path to tame inflation—which will mean further
deceleration in the broader economy in the months to come and higher risks
that the central bank could go too far. “This is an economy that
is still well-supported by a strong labor market,” wrote Seema
Shah, chief global strategist with Principal
Global Investors. “Yet, cracks are undoubtedly forming
and, with the Fed determined to contain inflation pressures, monetary
tightening will only prompt economic activity to decelerate further over the
coming months. Recession is not upon us, but it’s not too far away.” So on one hand it's positive for stocks that
the labor market, if not the broader economy, is still going strong. But on
the other hand it's negative insofar as it means the Fed thusly has leeway to
raise rates aggressively to beat runaway inflation. It's not surprising, then, that investors
weren't sure Friday how to react. Before the market opened and ahead of the
jobs report at 8:30 a.m. Eastern time, market futures were generally higher.
Then futures turned lower after the report was released. Then stocks opened
lower, rose midmorning, fell in the afternoon, and rose ahead of what turned
out to be the mixed close. The Dow Jones Industrial Average
and the S&P 500 both closed down
0.1% Friday, while the tech-heavy and more-rate-sensitive Nasdaq
Composite gained 0.1%. All three indexes closed higher on the
week. Bonds, however, may be telling a more
definitive story about where the economy is headed. Barron's Deputy
Editor Ben Levisohn writes: If recession fears are off
the table, at least for one day, the rise in bond yields should keep them
strongly in focus. The 10-year yield, at 3.063%, is 0.04 percentage points
lower than the 3.103% yield on the two-year Treasury, resulting in what’s
known as a yield-curve
inversion. A yield-curve inversion has been a good predictor
of future recessions, but only if it’s deep—this qualifies—and long-lasting.
We’re getting to the point where it’s starting to qualify. That doesn’t mean
a recession happens right now, just that one is coming, probably
in the next six months or so, if history is a guide. To keep with the theme of confusion,
consider this from Megan's jobs coverage and what it says about the labor
market as an indicator of today's economic health: Even in a recession, employers may be loath
to lay off workers because of the difficulties they have had in hiring over
the past two years, the thinking goes. And that should keep household balance
sheets and spending relatively stable. “This may be an economic downturn in terms
of GDP,” said Ron Hetrick, senior labor economist with Lightcast. “But I
don’t think you’re going to see the accompanying layoffs that go with it.” What does all this mean for stocks and other
financial markets going forward? Right now, it seems, your guess is as good
as any economist's. |
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