Is the labor market finally starting to cool? Inflation falls to 3% in June!
The June employment report missed expectations with 209,000 new jobs added to the U.S. economy versus the 240,000 estimate. The total, while still solid from a historical perspective, marked a considerable drop from May’s downwardly revised total of 306,000 and was the slowest month for job creation since payrolls fell by 268,000 in December 2020. Government hiring led the job gains, followed by health care, social assistance, and construction. Average hourly earnings increased by 0.4% for the month and 4.4% from a year ago. The unemployment rate fell 0.1% to 3.6%, but the broader U6 unemployment rate increased to 6.9%, the highest level since August 2022. The strong labor market was one of the key reasons cited by the Fed to keep hiking rates, but while one month does not make a trend, June’s report showed some weakness along with downward revisions to the April and May reports.
Inflation fell to its lowest annual rate in more than two years during June, the product of both deceleration in costs and easy comparisons against a time when price increases were running at a more than 40-year high. Headline CPI rose 0.2% month-over-month (M/M) or 3% year-over-year (Y/Y) in June, down from a 4% annualized rate in the prior month. Core CPI, which excludes volatile food and energy, rose 0.2% M/M or 4.8% Y/Y (down from 5.3%). Most of the increase in June inflation came from the lagging shelter component that rose 0.4% M/M or 7.8% Y/Y. Food prices rose just 0.1% M/M while used vehicle prices, a primary source for the inflation surge in the early part of 2022, declined 0.5%. Markets immediately reacted to the positive news and the Fed Fund Futures now only predict one more rate hike at the July meeting before ending the current tightening cycle.
Source: Bureau of Labor Statistics, CNBC
Bifurcation continues between manufacturing & services in the U.S. & globally
Manufacturing continues to exhibit sustained weakness in the U.S. and globally. The ISM Manufacturing PMI fell to 46.0 in June from 46.9 in May. New orders strengthened during the month, but production and employment both weakened, and all three key components were well below the 50 level that separates expansion from contraction. JP Morgan’s Global Manufacturing PMI hit a 6-month low of 48.8 in June with a sharp drop in new orders. After nearly flatlining in May, the ISM Services PMI increased to 53.9 in June (from 50.3 in May). Production, new orders, and employment all strengthened in June.
Corporate earnings may be bottoming out
We are about to enter the Q2 earnings season and analysts are forecasting a 7.2% decline in S&P 500 earnings. That figure has been revised lower from the 4.7% decline predicted on 3/31/23. EPS are projected to turn positive later this year and the full year 2023 estimate is still +0.8%. Analysts are forecasting earnings growth of 12.4% in 2024. The consumer discretionary, communications, and real estate sectors are expected to see the strongest earnings growth in Q2. Energy and materials are forecast to see the biggest declines. U.S. companies are excellent at providing conservative guidance and beating earnings to the upside. Stronger earnings will be necessary to help support more expensive valuations.
Special Nasdaq rebalance & growth/value timing
Before the open on July 24th, Nasdaq will conduct a special rebalance of the Nasdaq100 Index. This is the index’s second such rebalance in the last 25 years! The rebalance will maintain the existing index constituents but adjust their index share counts and weights in order to reduce the concentration. The current seven largest Nasdaq stocks will see their collective weight reduced to 44% from 56% today. Technology stocks will continue to account for roughly 50% of the index.
We believe market timing is nearly impossible and that is why we recommend always having elements of growth and value in a diversified portfolio. Through the end of Q2, the Russell 1000 Growth Index was 24% ahead of the Russell 1000 Value Index. In 2022, value led growth by 22%. Growth has certainly led the way over the past decade, but that may not always be the case and rotations can occur quickly, potentially leading to dramatic periods of out/underperformance.
Eurozone inflation fell last month, but business activity also appeared to stall again!
Eurozone business output growth came close to stalling in June, according to the latest HCOB flash PMI survey data produced by S&P Global. This points to renewed weakness in the European economy after the brief growth revival recorded in the spring. Inflows of new orders fell for the first time since January, employment growth slowed, and future output expectations deteriorated. More encouragingly, the slowdown was accompanied by a marked cooling of inflationary pressures. Eurozone inflation hit 5.5% in June, below analyst expectations, but core inflation remains stubbornly high, rising 5.4% Y/Y. Core inflation had eased to 5.3% in May, from 5.6% in April. Falling energy prices were a significant contributor to the decline. Headline inflation hits its lowest level since January 2022.
Japan’s GDP surprises to the upside, inflation finally above target levels
Japan’s economy grew at a faster than expected pace in Q1 due largely to robust spending by consumers and businesses. Japan’s GDP rose 2.7% Y/Y, well ahead of the initial 1.6% estimate. Private non-residential investment, or capital spending, rose 1.4%, higher than initial government estimates of 0.9%. Private demand rose by 1.2% and domestic demand rose by 1%, while exports of goods and services dropped 4.2%. Imports also fell by a revised 2.3%. The annual inflation rate in Japan unexpectedly declined to 3.2% in May 2023 from April’s three-month high of 3.5%. Core inflation also dropped to 3.2% in May from a three-month peak of 3.4% in April. Inflation has been above the Bank of Japan’s 2% target for 14 consecutive months.
China’s economy showing signs of stalling
Economic data in China point to a growth picture that appears to be stalling after the COVID reopening. China’s official manufacturing PMI came in at 49.0 in June, up slightly from 48.8 in May. The smaller company focused Caixin/S&P Global Manufacturing PMI slipped to 50.5 in June from 50.9 in May. China’s economy has yet to find its footing based on the lack of internal growth drivers, weak internal and external demand and deteriorating levels of consumer and business confidence. The official China non-manufacturing PMI fell to 53.2 in June from 54.5 in May. The services sector is crucial to China’s economy as it accounts for 58% of GDP and 48% of employment. In March, the non-manufacturing PMI had surged to its highest level in nearly 12 years. Chinese economic momentum has slowed in recent months with the main engine of growth in the country sputtering.
Source: Bureau of Statistics of China
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