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HEAT STROKE: A JOBS REPORT DEEP DIVE (1229 EDT/1429 GMT) As a heatwave persisted across much of the United States, the Labor Department's highly anticipated employment report tossed gasoline on the fire, suggesting the U.S. economy is running hot enough to withstand all the interest rate hikes the Federal Reserve has been and is expected to keep throwing at it.
The U.S. economy added a remarkable 528,000 jobs in July, more than double the 250,000 consensus, according to the Labor Department.
Total payrolls have now recovered all of the 22 million jobs hemorrhaged when pandemic shutdowns shoved the economy into its steepest and most abrupt recession in history. It took 30 months to recover that lost ground.
The report also marks the 19th consecutive month of job gains above the 200,000 mark, which marks the level necessary to accommodate new labor market entrants.
"The strength of the labor market in the face of 250 basis points of rate tightening from the Fed already this year clearly shows that the Fed has more work to do," writes Charlie Ripley, senior investment strategist at Allianz Investment Management. "Overall, today’s report should put the notion of a near-term recession on the back-burner for now and force the aggressive hand of the Fed by putting a 75 basis point rate hike back on the table for the September FOMC meeting."
While gains were seen across the board, the services sector was responsible for more than three fourths of the total, suggesting strong consumer demand.
The report eased worries that the Fed's interest rate hikes have chilled the economy into recession. On the contrary, taken as a standalone, the data suggests that rather than cooling, the economy is heating up.
Wage growth, perhaps the most closely scrutinized element of the report, surprised analysts by bucking the trend and rising higher. Average hourly pay accelerated to 0.5% from June, and posted an annual increase of 5.2%, repeating the previous month's upwardly revised reading.
"I’m surprised in the strength in wage growth, I was looking for a cooling off. That’s the key to the report," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "That’s why we’re seeing a sell off in the bond market and it proves that inflation is still a big problem."
Wage inflation is stickier than more transitory items such as energy and food, and suggests that hot price growth is going to take its sweet time returning to the Fed's average annual 2% target.
Despite the surprising strength elsewhere in the data, there was disappointing weakness in the labor market participation rate, which slipped 0.1 percentage point to 62.1%.
The steadily falling rate in part reflects rising retirement, but also suggests some working-age Americans are leaving the labor pool for good, as theorists behind the so-called "great resignation" would have it.
Labor market participation is closely watched by the Fed, and suggests that despite July's blockbuster topline gain, the jobs market remains tight.
Indeed, a lower participation rate means fewer players on the field, which is one reason why the already-low unemployment rate unexpectedly inched even lower to 3.5%.
Speaking of which, when broken down by duration, both the short- and longer-term unemployed saw their slice of the pie shrink.
Only those unemployed from 5 to 14 weeks were served a bigger slice than last month, hinting at the possibility that it's taking longer for fired workers to find new gigs, a notion supported by the most recent JOLTS data, which showed job openings retreating from record highs.
Still, there remain about 1.8 unfilled jobs for every unemployed worker.
Another sour note could be found in the widening racial/ethnic jobless gap.
While unemployment dipped for workers who identify as White, Asian and Hispanic, Black joblessness ticked 0.2 percentage points higher.
This resulted in the White/Black unemployment gap growing 40 basis points to 2.9 percentage points.
Finally, the so-called "real" unemployment rate, which includes workers only marginally attached to the labor market, held firm at 6.7 percent, hovering below the pre-pandemic level.
But the number of workers on part-time shifts due to economic reasons actually rose by 5.3% to 3.89 million. The fact that real unemployment didn't budge is likely attributable to the afore-mentioned dip in the participation rate.
The report moved all asset classes, pulling stocks lower, Treasury yields and the dollar higher.
Interest sensitive megacap market leaders were dragging the indexes lower and putting the S&P 500 on track for a weekly loss.
QUALITY STOCKS SHINE DURING EARNINGS SEASON (0943 GMT)
Fears of a global recession are high, but European earnings have so far dodged the worst of expectations and shares are at a two-month high.
And for Cyril Bertrand, portfolio manager at Eric Sturdza Investments, good stock picking on the earnings front is one reason his portfolio performed well this year.
"Our fund is overweight on quality stocks and underweight value, and this month we witnessed a decent rebound from the quality stocks we own," he said.
A few stand-out names from one portfolio of around $140 million include Dutch payments company Adyen, Dutch semiconductor company ASML, German medical equipment maker Sartorius and UK Croda International
Adyen shares are up 23% in the last month while ASML shares are 36% higher, Sartorius rose 12% and Croda is up 7%.
"The market is obviously worried about the probability of a recession... but companies are not confirming that so far, both in our portfolio and even outside."
Bertrand points to the upbeat signals from staffing companies as a positive signal on the wider macro environment, despite slowdown fears.
Major staffing company Adecco on Thursday reported a 13% increase in second-quarter revenue.
Looking forward to the rest of the year, Bertrand is still waiting to see if any signals of an activity slowdown materialise in the form of lower earnings from cyclical companies.
"We think that structurally the positioning of the fund on quality names, which can be either growth or defensive, in the current context should still be favourable."
Eric Sturdza Investments had $1.4 billion of assets under management as of June 30.
STOXX FLAT AS TRADERS AWAIT FOR U.S. JOB DATA (0744 GMT)
European shares are little changed with all eyes on U.S. jobs data due later in the day, which is expected to give clues to how much the Fed's hefty rate hikes is slowing economic growth.
Investors are also busy assessing yesterday's Bank of England's rate hike - its biggest in 27 years. The central bank warned that a recession in Britain is on its way.
The pan European STOXX 600 index is flat, but still set for its third consecutive weekly gains.
A mixed bag of earnings reports is also weighing. Deutsche Post shares added 5.8% on posting double-digit growth in revenue and earnings and confirmed its outlook for 2022.
WPP, the world's largest advertising group, increased its annual net sales outlook, but shares of the company fell 5.3% in early trading.
(Joice Alves)
PAYING PARTICULAR HEED TO PAYROLLS (0647 GMT)
U.S. payrolls data day is dawning shortly and set to tell us whether markets should be more worried about inflation or a recession.
As Rabobank notes -- Will a weak print provide more ‘pivot-fuel’ for a market already so drunk on it that it won’t heed the Fed saying “WRONG!” over and over – as they just did yet again yesterday? Conversely, will a strong payrolls number sober the market up?
If markets decide good jobs news is also good news for stocks, expect the bouncers at the Fed to shout even louder.
A Reuters survey of economists expects U.S. non-farm payrolls to have increased by 250,000 jobs last month after rising by 372,000 in June. But signs from other claims and related data warns of a poor number.
The jobs data will likely outshine most morning news in Europe, though Allianz <ALVG.DE and the London Stock Exchange Group are both due to report earnings.
Investors have had a night's sleep to see if they're happy with their response to the Bank of England raising rates by 50bps to 1.75%, their highest in 27 years - and warning of a long drawn out recession.
Two-year gilt yields fell, future hikes were priced out and cuts priced in, while the 10-year yield slipped 3bps to 1.88%.
Sterling lost ground on the euro, though clawed back its initial losses against the dollar in U.S. trading.
Shares rose in Asia this morning, particuarly in Taiwan , as markets decided China firing missiles near the island after Nancy Pelosi's visit was less worrisome than it could have been.
Key developments that could influence markets on Friday:
Economic data: US non-farm payrolls July, Canadian July jobs data, German June industrial output, UK Halifax housing data July
Europe earnings: Deutsche Post, London Stock Exchange, Rheinmetall, Allianz, WPP, Hargreaves Landsdown
US earnings: Goodyear Tire & Rubber, Western Digital Corp
(Alun John)
EUROPEAN FUTURES EDGE UP AHEAD OF U.S. JOBS DATA (0635 GMT)
European futures are edging higher ahead of U.S. jobs data, with investors waiting to see whether the Fed's aggressive pace of rate hikes is slowing economic growth in the world's largest economy.
Nonfarm payrolls are expected to increase by 250,000 jobs last month, after rising by 372,000 jobs in June.
EUROSTOXX 50 futures are up 0.2% pointing to a start of the day in the black for European bourses, with the STOXX 600 set for a third consecutive week of gains.
(Joice Alves)
