July 31 returns to the market calendar with Friday’s employment report

A year ago, the federal funds futures market believed the Fed would cut rates two to three times before the July 31, 2024, FOMC meeting. Two weeks ago, the odds of a rate cut at the July 31 meeting were slim to none. What’s more, the market was pricing in just one cut for the rest of the year. Friday’s jobs report, a fragile ISM report detailed below, and renewed signs that the disinflationary trend could resume have all brought the prospect of a July 31 rate cut back into focus.

On Friday, the BLS reported that the economy gained 206,000 jobs. The gain was slightly better than expected; however, the unemployment rate rose from 4.0% to 4.1%. In addition, April and May employment data were revised down by a combined 111,000. Like several previous employment reports, this one was good from a headline perspective, but the look under the hood is troubling.

So with the unemployment rate rising, could the Fed cut rates as early as July if inflation data this week is weak? While the odds are low, we’ll be watching Jerome Powell’s speeches on Tuesday and Wednesday for clues. This weekend Bulletin discusses why the thought of a Fed cut in July is not unthinkable. According to the article, “We don’t think so, but the data is increasingly supportive. But if the Fed cuts rates in July, that would likely be a good sign that we’ll need to become less aggressive in our equity allocation.“

What to watch today

Profits

There are no significant reports today.

Economy

There are no significant reports today.

Trade Market Update

The market is still in a very bullish trend, with investors becoming increasingly certain that they will receive higher returns. This contagious greed has also spread to professionals, whose exposure to stocks has exceeded 100%. While this is a warning sign, it does not necessarily mean that markets will have a deep correction. However, such extreme positions have previously signaled short-term peaks and consolidations.

In addition, the market’s deviation from the underlying 200-DMA is beginning to reach levels that have previously preceded short-term market corrections or consolidations. As always, for an “average” to exist, the market must trade above and below that average over time. Therefore, the more extreme the deviation from that average, the stronger the push for a reversal.

These are warning signs that the market needs a short-term correction or consolidation to ease these conditions. Such a process would be healthy for further bullish progress. However, this does not mean it will happen today or this month. As always, timing is the key.

Trade accordingly.

Next week

This week’s highlights will be CPI (Thursday), PPI (Friday), two speeches by Jerome Powell and the start of the earnings season.

If the Fed is going to cut rates on July 31, it will likely require a lower-than-expected CPI. The market is expecting a 0.1% increase in CPI and a 0.2% increase in core CPI. After a 0.2% decline last month, the PPI is expected to rise 0.2%. Jerome Powell will speak on Tuesday and Wednesday. He will likely deliver inflation reports before the speeches.

Earnings season begins this week, with the big banks reporting on Friday. A wider range of corporate earnings reports will be released next week.

ISM services were much weaker than expected

For the first time since 2009, excluding April and May 2020, the ISM Services Index (blue – lower chart) is in recession territory. Wednesday’s reading of 48.8 was well below estimates of 52.7 and the previous reading of 53.8. Within the index, the price paid index was weaker than expected, although still above 50, indicating higher prices. That said, the ISM manufacturing and services sectors are seeing their price indices resume lower trends. The employment index is the biggest concern. It came in at 46.1, well below the estimate of 49.5. This further confirms that the BLS headline employment growth data may be overstating the true state of labor markets. This has not gone unnoticed by the Fed, as it has acknowledged it.

New orders, a good leading indicator of activity, were also well below expectations at 47.3 versus the expected 53.6. The first chart below shows a solid leading economic indicator for the services sector. The ratio of backlog of orders to inventory sentiment is in recessionary territory. Additionally, the report includes the following quote:

The percentage of ISM Services respondents expecting new orders to increase is the lowest since the global financial crisis and lower than during the 2001 recession.

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2024/07/08

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