Baker Market Update
2024-07-05

Although we had a truncated week with the 4th of July holiday, there was plenty of market news on the economic calendar. As of the time of this writing, Treasury yields are down about 15-20bps across the yield curve from where we started on Monday as this week’s slew of economic data shows the economy has begun slowing more rapidly in recent months.

On Wednesday, Payroll processing firm ADP reported that private payrolls rose just 150k in June (est = 165k), the slowest pace since January. ADP tends to come in lower than the official non-farm payrolls report since it does not include government jobs. Adding to the weak employment news, the Department of Labor reported initial weekly jobless claims rose to 238k (est = 235k) last week and continuing claims rose for the ninth consecutive week to 1.858mm (est = 1.84mm), the highest level since late 2021. The sharp rise in continuing claims in recent months is a good indicator that workers are having a much harder time finding a new job after getting laid off and suggests the labor market has deteriorated further in recent weeks.

In another report, the Census Bureau reported that Factory Orders unexpectedly fell 0.5% (est = +0.2%) in May while the prior month was revised lower. The manufacturing sector has been in contraction for the last 2 years and this drop in orders suggests recovery is still lagging. The Institute for Supply Management reported their ISM Services Index unexpectedly plunged to 48.8 (est = 52.7), the lowest level since May 2020 (anything less than 50 indicates the sector is contracting). With the service sector representing nearly 80% of US GDP, the unexpected contraction in the ISM Services Index could potentially be a worrying sign for the health of the economy.

Earlier this morning, the US economy added 206k jobs in June (est = 190k) while the previous two months of job gains were revised lower by 111k. Job gains were led by government (+70k), health care (+49k), social assistance (+34k) and construction (+27k), while retail trade (-9k) and professional & business services (-17k) both saw a loss in jobs. The separate household survey of individuals showed a gain of just 116k jobs and an unexpected increase in the unemployment rate to 4.1% (est = 4.0%). That’s the highest level of unemployment since October 2021 and up 0.7% from the low of 3.4% in January 2023. Every recession in the last 50 years has begun with an increase in unemployment of 0.7% or less so the steady increase in unemployment will be concerning news for the Fed as it decides when and how much to begin cutting interest rates from 23-year highs. Average hourly earnings rose 3.9% from a year ago (est = 3.9%), continuing a trend of weaker wage growth over the last several years that will help bring down inflation towards the Fed’s stated goal of 2%.

Finally, the labor force participation rate rose to 62.6% (est = 62.6%), but still remains well below pre-pandemic levels of 63.3%. Altogether, this employment report was a mixed bag but will generally be seen as a weak report. Although the headline non-farm payrolls was slightly better than estimated, nearly a third of the gains were government jobs, the prior two months were revised lower by 111k and the household survey showed a much weaker gain of just 116k. Another concerning part of the employment report was the sharp drop in temporary help employment (-49k), the steepest decline in more than 3 years. Historically, a decline in temp employment normally precedes a recession as businesses tend to lay off temp-workers first before moving on to permanent layoffs.

Inflation numbers are on deck for next week as we’ll get a look at CPI and PPI for June. The market will be watching closely to see if the inflation data is able to further validate the softening economic numbers we received this week, or if the Fed will be forced to continue its tight walk between higher inflation and deteriorating employment.

I hope everyone enjoyed celebrating our great nation’s independence yesterday and wish you all a safe holiday weekend.