Where did that come from? 528,000 new jobs were created in July and if that’s not enough, BLS revised the May and June figures higher by another 28,000! The official unemployment rate ticked down to 3.5%, but U6 held steady at 6.7%. Some of the higher frequency employment data (i.e. jobless claims) had been flashing warning signs throughout the month, but today’s headline number speaks volumes about the attitude in Laborland, “Damn the torpedoes! Full speed ahead!” July wages also impressed with a 0.5% gain MoM, although core CPI clipping along at a brisk 0.7% MoM does take the shine off a bit. The proverbial fly in the ointment is the participation rate. At 62.1%, we are still not seeing much progress on this front despite the outsized payroll gains thus far in 2022. In an otherwise murky month of economic data, this report appears to greenlight continued upside for the greenback on the heels of higher short-term rates in the US.
Another month, another 75 bps from Chairman Powell… The effective fed funds rate (EFFR) now stands at a stunning 2.33% (and will go higher). As a point of reference, short-term rates have not been at this level since the fourth quarter of 2018, which also happened to mark the zenith of Trump’s trade war. Also, noteworthy is the fact that those tariffs, decried by many democrats as inflationary at the time, remain in full force today. Is inflation more of a problem today than in 2018? Well, just ask John Q. Public. The consumer price index has increased nearly 17% since the end of 2018, which equates to an annualized rate of ~4.6%-- more than double the Fed’s 2% objective! It is also particularly disturbing because this timeframe encompasses the pandemic era. Lest we forget the world effectively shut down in early 2020, which precipitated a rare and deep “twin shock” recession.
Speaking of recession, are we in one now? The answer this time around depends on who you ask. We are now staring at back-to-back quarters of negative US GDP growth, which qualifies as a shorthand version of recession in the minds of many. However, we are NOT in the midst of a broad-based, synchronized, and significant decline in economic activity. Our economy is driven by consumption and jobs fuel consumption (absent government checks). According to the latest data, retail sales jumped 1.0% MoM and real spending also increased 1.1% over the same period. The employment picture remains benign, and durable goods orders have proven to be quite resilient in spite of tightening financial conditions. However, financing costs continue to hinder home sales with inflation simultaneously eating away at the purchasing power of Americans across the income spectrum. Critically, inflation is a global issue, not simply a stateside nuisance; while it has been a difficult burden to bear domestically, we are still better off than the vast majority of others around the world—the strength of the US dollar has something to do with that. In recent weeks gasoline prices have come down in the US (along with oil prices), BUT the price of natural gas in Europe is of tremendous concern with winter approaching. Meanwhile, pricing for various foodstuffs continues to undermine stability in the developing world. There has been some progress on the inflation front lately, but it certainly isn’t all roses.
That said earnings continue to roll in and the results have been impressive to date. American businesses are churning out record profits at the operating level. Guidance has also been solid as we are more than halfway through the reporting period. The fact that there have been two consecutive quarters of economic contraction in 2022 and minimal operating impact for S&P 500 companies is a bit of an anomaly. This leads us back to money supply. The money in the economy will be spent—how quickly or how wisely is an open question. Meanwhile, inflation is without question changing the spending habits of consumers and businesses alike, but resilient consumption in the face of economic (and geopolitical) uncertainty is something we have seen before and will likely continue to see given the contours of the current environment.
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- July 2022)