Market 07/03: Economic data "confirms" recession risk

June ISM Services PMI + May Factory Orders both plunged: supports Fed rate cut

Both early economic indicators (leading indicators) suggest economic growth may slow in Q2/2024:

ISM Services PMI drops the most in 4 years

• Both ISM Manufacturing and Services PMIs share the downward trend in June — both approach contraction territory (below 50):

• ISM Services PMI plunges in June to 48.8 (estimate: 52.7 | previous 53.8) - fastest drop in 4 years.

• Meanwhile, S&P Global Services PMI conversely rises to 55.3 (estimate: 55.1 | previous: 54.8).

• …with almost all component indices (business activity, new orders, prices paid…) all declining.

• Component indices vs. previous month:

• Component index business activity even drops to the lowest since Covid period April 2020 → Service inflation may follow suit.

Factory Orders surprisingly plunge in May

• May Factory Orders surprisingly drop sharply -0.5% MoM (estimate +0.2%), previous month's data also revised down to +0.4% MoM.

• After 3 months of gains, core orders (ex-transportation) have fallen -0.7% MoM.

Labor market: ADP job growth down - continuing claims on the rise

ADP Survey: Job growth declines for 3 consecutive months

• Nonfarm payrolls (ADP survey) in June rise +150,000 (estimate: 165k | previous 157k) - down for 3 consecutive months.

• Job growth continues to concentrate in sectors services, especially the entertainment/hotel (+63k).

  • Meanwhile, many goods-producing sectors continued to shed jobs.

    

• Wage growth for job switchers and job stayers both slowed, reaching respectively +7.7% YoY and +4.9% YoY.

• ADP has underestimated the official BLS payroll data in 9/10 months so far.

  • … and ADP is not the official labor report that the Fed tracks.

Initial jobless claims rose for 9 straight weeks

• Initial jobless claims for the past week rose to 238,100 (higher than estimates & prior week: 234,000).

However, this is weekly data and does not reflect the trend.

• The 4-week moving average of initial jobless claims rose to 238,500.

• Continuing claims continued to rise to 1.858 million (higher than estimates 1.84 million | prior 1.832 million) - highest since December 2021.

• Overall, initial jobless claims are trending higher (aligning with the WARN layoff warning index) → The labor market is trending worse.

Challenger: May job cuts surged

• According to the Challenger Gray report, layoff announcements in May rose +19.8% YoY (prior: -20.3%).

• Of which, the construction sector recorded the largest surge in layoffs since September 2007.

Overall, the most important jobs report is still from the Bureau of Labor Statistics (Payroll Report + Household Survey) — updated on Friday this week after the holiday!

Market reaction:

A slew of jobs data + sharp drop in services PMI supports Fed rate cuts

• 2-year Treasury yield drops sharply after ISM services report.

Summary of FOMC Minutes for June meeting

Not much information in the June FOMC Meeting Minutes. A few key points include:

• Most FOMC members believe that economic growth is cooling.

• The majority of members hold the view tightening policy (monetary).

  

• The disinflation process is slower than the FOMC expected in December 2023.

  

• Fed's two goals: “inflation and employment” are moving towards balance

  

• A few members believe that if inflation remains high, there may be further rate hikes:

  

• May CPI is also seen by the Fed as evidence of the disinflation process.

  

• Declining demand (consumption) may have a greater impact on labor demand.

  

Overall, the attitude of FOMC members remains wait and see more economic data + not confident enough in the inflation situation to cut rates:

• FYI: Full details of the June FOMC Meeting Minutes.

Crude oil inventories fell more than expected

API Report:

• Crude -9.16mm - largest draw since January 2024.

• Cushing +404k

• Gasoline +2.47mm

• Distillates -740k

DOE Report:

• Crude -12.16mm - largest crude draw since July 2023.

• Cushing +345k

• Gasoline -2.21mm

• Distillates -1.54mm

• Biden administration added 398,000 barrels of oil to the national Strategic Petroleum Reserve SPR - highest since last July.

Some other news: Nancy Pelosi sells Tesla and buys Nvidia and Broadcom

1. House Speaker Nancy Pelosi sold $500,000 of Tesla stock, and bought $1.2 million Nvidia (NVDA), $5 million Broadcom (AVGO).

• Investor expectations for Tesla stock upside are the highest since 2021, after TSLA rose 34% in 3 weeks.

2. Presidential election: The chance of Biden withdrawing shows no signs of stopping, continuing to rise to ~75%.

• Biden is considering whether he can continue running for office.

• Prediction market odds for Kamala Harris winning remain higher than Biden's.

  • However, she has never said she will run for president.

• Democratic Party approval rating plummets to record low.

3. Apple will become an observer on OpenAI's board of directors.

4. Interior Department approves offshore wind project in New Jersey.

5. Asia: Japan and China's service PMIs share a bleak trend.

   • Japan's service PMI falls for the first time in 2 years to 49.4 due to declining domestic demand.

• Caixin/S&P China Services PMI falls to 51.2 in May - lowest since October 2023, lowest confidence in 4 years.

6. Office vacancy rate exceeds 20% for the first time in history.