Bulls Shrug Off Stubborn Unemployment and Wage Growth Numbers

Equities rallied this morning after opening sharply lower. The weaker-than-projected June jobs report did little to alleviate worries about the Federal Reserve reinitiating rate hikes, but stocks managed to recover nonetheless.

The S&P 500 marked a 0.3% upswing, while the Nasdaq Composite ascended by 0.6%. The Dow Jones Industrial Average lingered around the breakeven point.

Yesterday’s promising ADP report, which suggested that nearly half a million Americans had miraculously found employment, was quickly dampened by a less-than-stellar jobs report from the Bureau of Labor Statistics (BLS). The June payroll data showed a mere 209K new jobs, a significant decline from the previous month’s impressive 339K count, which was revised downwards to 306K – the lowest figure since December 2020.

This figure fell short of economists’ median prediction of 230K, marking the first miss since April 2022 and snapping a 13-month streak of surpassing expectations.

Furthermore, revisions were made not only for May, but also for April – both were adjusted downwards. The overall nonfarm payroll employment was adjusted down by 77,000 for April, and by 33,000 for May. With these revisions, combined employment for April and May is now reported 110,000 lower than previously indicated. In fact, each month in 2023 has now been revised lower.

Notably, after a sharp decline in the Household Survey employment last month, June saw a recovery with an increase of 273,000, largely offsetting the previous drop of 310,000, contrary to the payroll gains stemming from the Establishment survey.

While the unemployment rate remained steady at 3.6%, surpassing expectations of a rise to 3.7%, disparities were evident among various worker groups. White unemployment fell to 3.1% in June, whereas Black unemployment reached its highest since August 2022. Unemployment rates for adult men (3.4%), adult women (3.1%), teenagers (11.0%), Blacks (6.0%), Asians (3.2%), and Hispanics (4.3%) remained fairly unchanged over the month.

The underemployment rate also remained unaltered at 62.6%, as expected.

With unemployment staying level, hourly earnings exceeded expectations with a rise of 0.4% in June, higher than the anticipated 0.3%, and mirroring the upwardly revised figure from last month. On a yearly basis, hourly earnings remained flat at 4.4%, surpassing the projected 4.2%.

Specifically, average hourly earnings for all private nonfarm payroll employees increased by 12 cents, or 0.4%, to $33.58. Over the past 12 months, average hourly earnings have risen by 4.4%. For private-sector production and nonsupervisory employees, average hourly earnings in June increased by 11 cents, or 0.4%, to $28.83.

The average weekly hours showed a slight rise from 34.3 to 34.4, slightly above the expected 34.3. However, in the manufacturing sector, the average workweek and overtime hours remained steady at 40.1 and 3.0 hours, respectively. The average workweek for production and nonsupervisory employees on private nonfarm payrolls also held steady at 33.8 hours.

In terms of job composition, it’s rather peculiar to note that the primary contributor to the 209K jobs added was the government sector.

Government employment increased by 60,000 in June, with a continued upward trend in both state (+27,000) and local government (+32,000) jobs. On average, the government has added 63,000 jobs per month in 2023, more than twice the monthly average of 23,000 in 2022.

Despite the weaker-than-expected headline payroll numbers, the persistently low unemployment rate and continued rise in hourly earnings suggest that the Federal Reserve may still be on track for a rate hike in July. The report’s mixed signals give the Federal Reserve enough justification to proceed with a 25 basis point hike at the next meeting, but they don’t necessitate pricing in much beyond that.

“It’s kind of a mixed picture today,” observed Truist’s Keith Lerner. “It’s good news that the economy is not falling apart, it’s still chugging along, but you still have these wage pressures that are going to keep the Fed likely to raise rates at the end of the month.”

In the short term, Lerner suggested that the equities market is poised for a pullback after a substantial June and second quarter. This could result in consolidation and irregular activity as markets transition into the earnings season.

Post the major data release on Friday, traders maintained their wagers on a resumption of rate hikes later this month, factoring in a 92% likelihood of a quarter-point hike on July 26. This mirrors the odds from the previous day, according to CME Group’s FedWatch tool. Policymakers hinted at two more potential rate hikes for 2023 during their June meeting.

The question is whether stocks will continue higher from here. Given that the market is already in an uptrend, momentum certainly favors bulls. But stubbornly low unemployment and high wage growth are going to give bears an opportunity to take control, especially if the current week’s S&P low of 4,385 is taken out next week.


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