This week, market volatility continued as concerns about regional bank stability, Fed interest rate policy, and the possibility of a recession weighed on investors’ minds with the S&P 500 closing down 0.71% for the week. Let’s look at some of the latest economic data and see what it suggests about where the economy and markets may be headed.
For the most part, the S&P 500 has been range-bound between 3800 and 4200 for the past year. Up or down days shouldn’t cause much excitement or worry right now. A catalyst is needed to break out of this range.
The Federal Reserve Bank of New York updated its recession probability estimate to 57.77% - the highest it’s been in 40 years!
Chart - NY Fed Probability of Recession
The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rose to 47.1 last month, remaining below 50 and indicating a contraction. Meanwhile, the Manufacturing Prices Paid Index increased to 53.2, showing rising prices paid despite slowing manufacturing.
The Job Openings and Labor Turnover Survey (JOLTS) report shows a decline of 3.85% in non-farm job openings from last month, with 9.59M openings. The gap between job openings and unemployed persons is narrowing.
Chart - Unemployed Persons vs. JOLTS
ADP private payrolls surged by 296K in April, beating expectations of 133K! This is further evidence that the labor market remains strong. The most significant gains were in leisure and hospitality, followed by education, health services, and construction. The financial and manufacturing sectors lost jobs in April.
Chart - ADP Private Payroll Report
As expected, the Federal Reserve raised the federal funds rate by 0.25% to 5% - 5.25%. This marks the 10th rate increase and the fastest pace in 40 years. Equity markets fluctuated during the Fed Chairman’s press conference and closed lower. Despite speculation that this is the end of the rate cycle, the Fed left the door open for future hikes and no plans for rate cuts this year. This week’s interest rate hike brings the Fed Funds rate to the same level as just before the Great Financial Crisis. While conditions are different, it’s interesting to note that this is the level where instabilities in some financial institutions began to be exposed.
Chart - Fed Funds Now vs. Great Financial Crisis
Weekly initial claims for unemployment insurance were 242K bringing the 4-week average to 239,250.
The U.S. Bureau of Labor Statistics reported that April non-farm payroll employment rose by 253K, and the unemployment rate decreased to 3.4% which ties the record going back to 1969, while labor force participation remained steady at 62.6%. Average hourly earnings also increased by 0.2%. Low unemployment and rising wages potentially contribute to higher inflation and may prevent the Federal Reserve from easing monetary policy as quickly as some expect. The upcoming Consumer Price Index (CPI) report will provide further insight into the impact of the tight labor market on inflation. The Fed may act in response to significant disruptions within the banking system.
Chart - Monthly Unemployment Rate
With much of the earnings season behind us, it’s clear that while earnings have decreased year over year, they have still exceeded expectations. Next week, investors will shift their focus to inflation data while continuing to monitor the stability of regional banks.