The US jobs data for June this Friday will give markets a good idea of the unusual first-half resilience of the American economy and labour market in the face of the spate of rate rises from the Federal Reserve.
Despite numerous predictions, the US economy has not slumped like so many "gloomsters" had been predicting.
In fact, the US economy easily (in retrospect) avoided the much-predicted recession in the first half of this year (as it did in late 2022).
The gloomsters have now switched their forecasts to the new half of this year and into early 2024, which is not to say that the risk of a slump still remains very high with at least two more rate rises from the Fed now expected, the first later this month.
But it is now very clear that the US (led by the Fed) has made considerable progress at bringing down inflation, and the big policy quandary for the Fed is how much further do interest rates rise to push cost pressures even lower, without puncturing the very strong jobs market.
Even though US earnings are forecast to be down 5.7% on average for the S&P 500 companies in the second quarter, it is clear the wider economy and especially the jobs have weathered 500 basis points of rate rises in the 12 months to June 30. FactSet reckons earnings will be down 6.5%.
Last week saw first quarter economic growth upgraded to 2%, from 1.3% in the first estimate, an outcome far better than any forecaster had thought.
US first-time unemployment benefit claims fell in mid-June and remain far below levels many economists thought they would get to by June – they fell 26,000 to 239,000, an unexpected outcome.
US inflation (as measured by the Fed’s favoured PCE Index) fell in May, and core inflation also eased. Overall consumer prices rose 3.8% in the 12 months through May, according to the PCE measure. That's down from the peak reading of 7% last September and 5.4% in January.
Consumer Price Index figures show headline inflation was 4% in May, down from the peak of 9.1% in June 2022. Core inflation remains above 5% and is slowly easing, but the measure excluding housing (mostly rent) costs is showing a bigger fall to below 4%.
The continued solid job growth has helped boost markets this year and seen investors cautiously accept the belief that the US economy can avoid a severe recession.
As we have pointed out the Fed’s upgrade of its 2023 growth forecast to 1% from 0.4% in March and the lower peak for unemployment of 4.1% (3.7%) in May. Economists forecast no change in the jobless rate in next Friday’s labour market release and 250,000 new jobs (the surprisingly high 339,000 in May).
This week also sees the release of the job openings (vacancies) data for May – the 10.1 million figure in April was a shock as it was much higher than forecast and saw a big rise. Economists forecast an easing to 9.9 million in May, which is still very high.
"The labour market is probably going to end up proving to be the big catalyst for what may happen market-wise and also monetary policy wise," said Omar Aguilar, chief executive officer and chief investment officer of Schwab Asset Management.
Second-quarter corporate results will kick next week with weakish results from major banks. July 14 sees results from Citi, JPMorgan Chase, and Wells Fargo while the following Tuesday sees Bank of America and Morgan Stanley, and then Goldman Sachs on the Wednesday.
Netflix and Tesla are due to report that day (July 19), and good reports from both tech heavies could very well change the reporting season sentiment. Apple and Amazon are due to report on July 26 after Alphabet and Microsoft release their reports on July 24 and Meta on July 25.
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On Friday, the Nasdaq wrapped up the first six months of the year with a 1.5% rally for the day, taking its gains so far for 2023 to 31.7%. That’s the strongest first-half jump in the tech-heavy index since 1983, when the Nasdaq rose 37%.
The S&P 500 notched a 16% gain, and the Dow Jones Industrial Average rose just 2.9% as investors again deserted value stocks for the lure of AI and related technologies and rediscovered the joys of Apple and Tesla.
Apple shares jumped 49% in the first half of the year, while AI favourite Nvidia saw a 190% jump, followed by Meta (META) at 138%.
The Nasdaq grew by 31.7% in the first half of the year, notching its largest first-half percentage gain since 1983.
Remember that at the start of 2023, Apple’s market cap fell below $2 trillion in trading for the first time since early 2021, but it almost started a slow rebound that accelerated after a good first-quarter report. Now it's valued at $3.05 trillion.
The S&P 500 rose 6.5% in June, its best monthly performance since January. It also notched its third consecutive quarter of growth, up 8.3% in the second quarter.
The Dow was up 4.6% for June, and the Nasdaq added 6.6%. For the June quarter, the Nasdaq was up 12.8%, and the Dow rose by 3.4%.
The ASX 200 rose 8.7% over the 2022-23 financial year to June 30, but had tiny gains for the June quarter – 0.36% and was up 0.8% in the month of June.
WiseTech Global (ASX:WTC) stood out, more than doubling over the year to June, with a 62% jump in the first half of the year. It is now worth more than $26 billion AUD.
