Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Jobs surprise. 

497'000 is the number of private jobs that the US economy added last month. 497'000. The number of quits rose to 250'000. But happily, the job openings fell by almost half a million, and more importantly for the Federal Reserve (Fed) – who is fighting to abate inflation and not necessarily jobs, the sector that saw the biggest jobs gains – which is leisure and hospitality which accounted for more than 230'000 of the jobs added – also saw the sharpest decline in annual pay growth. The pay for this sector's workers grew 7.9% last year, down from 8.4% printed a month earlier. But that detail went a bit unheard, and under the shadow of the stunning 497'000 new jobs added. And the too-strong ADP report that, again, hinted at a too-resilient US jobs market to the Fed's very aggressive rate hikes, ended up further fueling the Fed rate hike expectations. The US 2-year yield spiked above 5%, and above the peak that we saw before the mini banking crisis hit the US in March, while the 10-year yield took a lift as well, and hit 4%, on indication that, recession doesn't look around the corner... at least if you follow the US jobs numbers. 

So today, the official US jobs data could or could not confirm the strength in the ADP figures, but we are all prepared for another month of strong NFP data, and lower unemployment. If anything, we could see the wages growth slow. If that's the case, investors could still have a reason to see the glass half full and bet that the US economy could achieve the soft landing that it's hoping for.  


Equities pressured. 

The S&P500 and Nasdaq fell yesterday as the US yields spiked on expectation that the Fed won't stop hiking rates with such a strong jobs data, as such a strong jobs market means resilient consumer spending, which in return means sticky inflation.  

Other data confirmed the US' economy's good health as well. ISM services PMI showed faster-than-expected growth and faster-than-expected employment, and slower but higher-than-expected price growth in June. If we connect the dots, the US manufacturing is slowing but services continue to grow, and services account for around 80% of the US economic activity, so no wonder the US jobs data remains solid and consumer spending remains resilient, and the US GDP growth comes in better than expected, and we haven't seen that recession showing up its nose yet.  

But the darker side of the story is, this much economic strength means sticky inflation, and tighter monetary conditions, and the dirty job of pricing it is done by the sovereign markets. And many investors think that when there is such a divergence of opinion between stock and bond traders, bond traders tend to be right.  

But at the end of the day, the stock market's performance  will depend on how much pain the Fed will put on the Wall Street from the balance sheet reduction. If the Fed just continues hiking the rates and do little on the balance sheet front, it will only hit Main Street, and there will be no reason for the equity rally to stall. Voila. 


By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Ipek Ozkardeskaya

Ipek Ozkardeskaya provides market analysis on FX, leading market indices, individual stocks, oil, commodities, bonds and interest rates.
She has begun her financial career in 2010 in the structured products desk of the Swiss Banque Cantonale Vaudoise. She worked in HSBC Private Bank in Geneva in relation to high and ultra-high net worth clients. In 2012, she started as FX Strategist in Swissquote Bank. She worked as Senior Market Analyst in London Capital Group in London and in Shanghai. She returned to Swissquote Bank as Senior Analyst in 2020.
She is passionate about the interaction between the economy and financial markets. She has been observing and analyzing a wide variety of relationships between the economic fundamentals and market behaviour over the past decade. She has been privileged to live and to work in the world's most exciting financial hubs including Geneva, London and Shanghai.
She has a Bachelor's Degree in Economics and a Master's Degree in Financial Engineering and Risk Management from the University of Lausanne (HEC Lausanne), Switzerland.