Stocks took a hit today as surprisingly strong jobs data stirred up investor worries regarding the economy’s health and the direction of interest rates.
The Dow and Nasdaq Composite both plunged 1.3% while the S&P outperformed slightly, falling 1.1%.
The root of today’s drop was an enormous private payroll gain of 497,000 jobs in June, the largest monthly gain since July 2022, according to ADP. The leap far outpaced the Dow Jones consensus estimate of 220,000 and notably outperformed the revised May increase of 267,000 jobs.
As if that wasn’t hawkish enough, ADP has had a tendency to underestimate the number of jobs reported by the BLS in the official monthly jobs report. Nine of the last eleven ADP private payrolls releases showed smaller jobs gains than the BLS did. This suggests that there’s a good chance we’ll see a jobs add above 500,000 tomorrow morning.
Economists anticipate an increase of only 240,000 nonfarm payrolls by comparison.
As a result, traders may be bracing for a hot read tomorrow, which could spur the Fed to restart its rate hike campaign this month after hitting pause in June. According to the CME Group’s FedWatch tool, the probability of a hike during the Fed’s upcoming meeting this month is currently pegged at roughly 95%. That’s up from 88.7% yesterday.
John Lynch, chief investment officer at Comerica Wealth Management, conveyed that the market would have been more comfortable with an expected figure.
“But because it was more than double expectations, that really ratchets up the fear factor that the Fed would have to be more aggressive,” he said.
On a slightly more positive note, the Labor Department reported a larger-than-anticipated decrease in job openings for May (sliding by 496,000 to 9.82 million from an upward-revised 10.32 million). This data offered a glimmer of hope that the tight labor market might be starting to ease somewhat.
The figure released came in at around 1.6 million below last year’s count of 11.4 million and also fell short of the consensus estimate of 9.9 million, marking an uncommon underperformance in a series usually renowned for outdoing Wall Street’s expectations.
The BLS reported that the most significant drops in job openings were seen in the sectors of healthcare and social assistance (down by 285,000), finance and insurance (down by 139,000), and other services (down by 78,000). On the flip side, job openings saw a rise in educational services (up by 45,000), state and local government education (up by 37,000), and the federal government (up by 24,000).
This downward shift in job openings led to a drop in the margin between job openings and the number of unemployed workers to just 3.727 million, the smallest gap seen since September 2021.
To put it another way, after peaking at 1.82 openings for each worker in April, May witnessed a decline to a mere 1.611, the lowest ratio since October 2021.
In a conflicting turn, despite the resumption of the downward trend in job openings, the number of individuals leaving their jobs – a measure typically linked with a strong labor market as it signifies worker confidence in finding better wages elsewhere – surprisingly surged past 4 million. This equates to an increase of 250,000 within the month, marking the largest monthly jump since November 2021. The BLS reports that this increase in job departures was most pronounced in healthcare and social assistance (up by 69,000) and in construction (up by 57,000).
Further compounding the mixed signals, the number of hires also witnessed a jump in May, rising by 107,000 to a total of 6.208 million.
But keep in mind, as we’ve pointed out multiple times in the past, that the reliability of this data is questionable. One of the simplest reasons being the JOLTS survey’s response rate, which languishes at a record low of 31%. This implies that only those who have job openings to report are doing so, while about two-thirds of employers are either non-responsive or their responses are somehow lost. Thus, the only responses received are those that confirm the BLS’s expectations.
In all likelihood, labor remains tighter than the JOLTS implies, which means that the Fed’s still saddled with an impossible combination of tight labor, explosive payroll adds, and well above-target inflation despite raising rates at nearly every meeting since March 2022.