Job Market Remains Strong as Economic Data Points to Robust Growth
The job market in the United States continues to show resilience and strength, as indicated by the latest economic data. Various indicators suggest that the economy is still robust and likely to experience further growth.
One of the key pieces of data to look out for is the Senior loan officer survey, which will be released on Monday at 2 PM ET. This survey will provide insights into whether credit conditions are tightening and if banks are reducing lending. Despite modest pullbacks in commercial and industrial loans and leases, the levels remain historically high, indicating a healthy lending environment.
On Tuesday, the JOLTS data and the ISM manufacturing index will be released, followed by the ADP job report on Wednesday. On Thursday, investors will be expecting initial jobless claims, unit labor cost, and productivity data, while Friday will bring the highly anticipated job report for June, with expectations of creating 200,000 new jobs and an unchanged unemployment rate of 3.6%.
The strong economic data aligns with the performance of the 2Q GDP, which surpassed expectations. The positive numbers indicate that the economy is on a steady upward trajectory, leading to speculations of potential rate hikes in the future.
Despite the encouraging economic data, it appears that the equity market may be underestimating the risks associated with interest rates. The equity risk premium between stocks and bonds has reached levels not seen in many years, highlighting the need for caution.
The increased risk is also reflected in the rise of long-term rates and the potential for them to break out, challenging their previous highs. The United States 30-Year rate has the potential to surpass 4.25%, while the 10-Year rate could also reach or surpass that level.
The narrowing spread between the current earnings yield and the 10-year rate is also a cause for concern. Historical trends indicate that this spread is at a critical inflection point, suggesting that stocks may become expensive compared to bonds.
Furthermore, rising oil prices could contribute to the upward pressure on rates. Oil prices are close to reaching a breakout point, with the potential to climb back to the low 90s. Gasoline prices are also consolidating, potentially indicating an impending increase towards $3.15.
In the midst of these developments, the S&P 500 formed a bearish engulfing pattern on Thursday, signaling a potential trend reversal. Although the index rebounded somewhat on Friday, it only recovered a portion of the previous day’s losses. Failure to surpass the early week high at 4,605 could lead to a significant drop in the index, erasing recent gains and pushing it below 4,200.
Analysts point to a rising wedge pattern in the S&P 500, which may indicate a downward trend if the lower up-trend around 4,500 is broken. In such a scenario, a return to the origin of the S&P 500 could result in a drop back to 4,100.
Taking all these factors into account, it’s clear that investors need to remain cautious. While the job market and economy display strength, the risks associated with interest rates, stock valuations, and potential market reversal should not be ignored. It is vital to monitor economic data and be aware of any shifts in the lending environment, as they can significantly impact market dynamics.
