Market Perspective for July 10, 2022

The major market indexes were up for the week, helped by a strong jobs report. The S&P 500 gained 2 percent, and the Dow Jones Industrial Average was up almost 1 percent. The Nasdaq gained 4.6 percent for the week and has closed five straight days in the green for the first time this year.

For the year, the markets are still down. The Dow is down 13.8 percent, the S&P 500 is lower by 18.2 percent, and the Nasdaq is down 25.6 percent

The jobs report for June was released on Friday, showing an increase of 372,000 jobs. The better-than-expected report calmed fears that a recession had either already begun or was about to begin. The unemployment rate stands at 3.6 percent, which is a figure that is not consistent with an economic downturn.

There has been a great deal of talk that we are already in a recession, which will be proven right or wrong when the second-quarter GDP is released later this month. But four months in a row of nearly 400,000 job growth is making some feel we will avoid two consecutive negative GDP reports.

The economy will be put to the test in the coming months with continuing high inflation and an almost certainty that the Federal Reserve will raise rates several more times this year.

The first quarter GDP shrank by 1.6 percent, and the latest from the Atlanta Federal Reserve’s GDPNow tracker believes that the second quarter will show another contraction of 1.2 percent. Most economists define a recession as two consecutive negative GDP reports.

Initial unemployment benefits filings reported on Thursday showed an increase of 4,000 from the previous period at 235,000. The total is the highest since January 15. The four-week moving average increased to 232,500, its highest level since December 2021.

More concerning is the planned layoffs figure. According to the job placement firm Challenger, Gray & Christmas, planned layoffs jumped to 32,517 in June and the highest total since February 2021.

The auto sector reported a 155 percent increase in layoffs compared with the same period last year. The real estate sector also reported a high number of layoffs. The job placement firm said ten industries have already announced more layoffs this year than in 2021 out of the 30 industries they follow.

Also noted in the job report was that the average hourly earnings increased just 0.3 percent, which could be another sign that inflation is slowing. For the year, average hourly earnings are up 5.1 percent on a 12-month basis.

The yield curve inverted last Tuesday for the second time this year when the 2-year U.S. Treasury yield rose above the 10-year Treasury yield. An inverted yield curve is an indicator of a possible recession. The last time the yield curve inverted was last April. As of the close on Friday, the yield curve remains inverted.

Oil prices fell below $100 per barrel last week for the first time since early May. If a recession occurs, the belief is that there will be a drop in demand for oil. But the drop below $100 didn’t last long as West Texas Intermediate closed Friday at $104.80.

Recession worries also caused the 30-year fixed mortgage rates to drop again last week. Over the past two weeks, mortgage rates have dropped by half a percent. The 0.5-point drop only provides minor relief to potential homebuyers as home prices remain high.

Housing should continue to normalize if price growth slows due to a lack of buyers, an economic slowdown and an increasing housing supply. According to Freddie Mac, the average 30-year fixed mortgage stands at 5.3 percent.

Next week, second-quarter earnings begin, and the June consumer price index will be released. The consumer price index will give the Federal Reserve an idea if their rate hikes are starting to slow inflation. The CPI report could influence their decision later this month at the next FOMC meeting.

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