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US Stock Market “Shocked” by Explosive Employment Data, Expectations of Aggressive Interest Rate Hikes Rise

The U.S. stock market was “shocked” by the explosive employment data, and expectations of aggressive interest rate hikes rose rapidly. On July 6, local time, the US ADP employment report showed that the number of US private sector employment increased by 497,000 in June after seasonal adjustment, more than twice the market expectation of 225,000, far exceeding the previous value of 278,000 . It was the largest monthly increase since July 2022.

After the release of the data, the global financial market was shocked. Among them, the U.S. treasury bond market reacted most violently. The yield of the U.S. two-year treasury bond, which is sensitive to interest rates, once rose above 5.10%, the highest level since June 2007; the three major U.S. stocks The index collectively opened lower and moved lower. The Dow had the largest intraday drop of more than 500 points. As of the close, the Dow fell more than 1%, the Nasdaq fell 0.82%, and the S&P 500 fell 0.79%. In addition, European stock markets also collapsed across the board. The European Stoxx 600 Index fell by more than 2%. The stock indexes of major European countries all fell. over 2%.

The unexpectedly “explosive” job market has made the Fed’s hawkish expectations rise sharply. On July 6, local time, Dallas Fed President Logan said that he was very concerned about whether inflation could cool down quickly, and further interest rate hikes may be necessary. In addition, in its latest report, Goldman Sachs advised investors to be prepared that the U.S. stock market may suffer a drop of more than 20% due to a potential recession in the next few months.

completely off the charts

On July 6, local time, the US ADP employment report showed that the number of US private sector employment increased by 497,000 in June after seasonal adjustment, more than twice the market expectation of 225,000, far exceeding the previous value of 278,000 . It was the largest monthly increase since July 2022.

ADP chief economist Nela Richardson said the consumer-facing services sector performed strongly in June, driving job creation above expectations. But wage growth in these industries continues to weaken, and hiring may have peaked after a late-cycle surge.

In terms of industries, the leisure and hospitality industry added 232,000 employees, leading the entire private sector, followed by the construction industry, which added 97,000 employees, and trade, transportation and utilities, which added 90,000 employees.

This suggests that the U.S. labor market did not show any signs of slowing down in June, with companies creating far more jobs than expected.

After the release of the ADP employment data, the financial market was shocked. Among them, the U.S. treasury bond market reacted most violently. U.S. bond yields rose in a straight line. The U.S. 2-year treasury bond yield, which is sensitive to interest rates, once rose above 5.10%, the highest level since June 2007; The yield once rose above 4.08%, a four-month high, and was around 4.03% by the end of the bond market, up nearly 10 basis points within the day.

The U.S. stock market suffered a dive. The three major indexes collectively opened lower and moved lower. The Dow had the largest intraday drop of more than 500 points. The midday decline narrowed. The 500 Index fell 0.79%, chips, AI, and Chinese concept stocks underperformed the broader market, and the Nasdaq China Golden Dragon Index fell 3.04%.

Wall Street analysts pointed out that the exploding job market indicates that the risk of U.S. inflation may rise again, and market concerns about further aggressive interest rate hikes by the Federal Reserve are rising.

In addition, European stock markets also collapsed across the board. As of the close, the European Stoxx 600 Index fell by more than 2%, and the stock indexes of major European countries fell. Stock indexes fell more than 2%.

The European government bond market also suffered a severe setback, and the yields accelerated after the release of the U.S. “small non-agricultural” employment report. Among them, the U.K. 10-year benchmark treasury bond yield once touched 4.70%, hitting a new intraday high since October 2008; The yield on 2-year British government bonds once rose above 5.50%, the highest level since 2008 during the session.

The current interest rate hike expectations in the European market are also heating up, and investors are fully pricing that the Bank of England will raise interest rates by 50 basis points again in August this year.

It is worth mentioning that on Friday night, the U.S. Department of Labor will release the non-farm payrolls report that the market will pay more attention to. Following the increase of 339,000 people last month, the current market expects an increase of 240,000 people this month. Once the data exceeds expectations, it will become a market risk event again.

The latest statement from the Federal Reserve

The unexpectedly “explosive” job market has made the Fed’s hawkish expectations rise sharply.

On July 6 local time, Lorie Logan, the 2023 FOMC voter and chairman of the Dallas Fed, said that he was skeptical about the significant impact of the lagging effect of interest rate hikes; in order to achieve the FOMC’s goals, stricter policies need to be implemented; There are serious concerns about whether inflation can cool down quickly and further rate hikes may be warranted.

Minutes of the Federal Reserve meeting released just a day earlier showed that almost all officials expected more rate hikes in 2023 to continue fighting stubborn inflation. Those who support raising interest rates point to a very tight labor market, stronger-than-expected economic momentum and no evidence that inflation will gradually return to the 2% target.

The job market data just released has also verified the Fed’s concerns, which will also strengthen the Fed’s determination to raise interest rates further. At present, the market is worried about whether the number and magnitude of interest rate hikes by the Federal Reserve this year will exceed expectations.

In addition, the minutes of the meeting also showed that Fed officials were worried that continued high inflation may push up inflation expectations and that commercial real estate was weak, and emphasized the need to monitor whether the tightening of credit conditions related to the banking industry would drag down the economy; Interest rates are under upward pressure in the short term; Fed staff still expect a mild recession this year due to the impact on the banking sector, but see a near-equal chance of avoiding a recession.

Goldman Sachs warning

For the US stock market, Wall Street giants are issuing risk warnings one after another. Among them, Goldman Sachs advised investors to be prepared that in the next few months, the U.S. stock market may suffer a drop of more than 20% due to a potential economic recession.

Goldman Sachs chief U.S. equity strategist David Kostin said in his latest report that some portfolio managers expect a U.S. recession to begin next year, in line with most economic forecasters. In that case, the S&P 500 could drop 23% to 3,400.

Goldman Sachs believes now is a good time for investors to hedge against future losses in their portfolios. Kostin gave 5 reasons in the report:

1. With a large number of investors already long, it may be more difficult for the market to rebound further from now on;

2. A small rebound in the market indicates rising downside risks. Historically, sharp declines in market breadth have typically been associated with sharp pullbacks in subsequent months. Measured by this measure, market breadth recently saw its largest decline since the tech bubble narrow;

3. Valuations are high both in absolute and relative terms, with the NTM P/E ratio of the S&P 500 index at 19 times, the 88th percentile since 1976;

4. The stock market already reflects an optimistic outlook. Economists at Goldman Sachs expect US GDP growth to average 1% in the second half of 2023. However, the stock market, as measured by the performance of cyclical stocks relative to defensive stocks, means that the economy The growth rate is about 2%;

5. Position adjustment is no longer a tailwind for the stock market. The latest data shows that the US stock sentiment index hit a 114-week high, which shows that capital flows are unlikely to be the driving force for the stock market this year.

Goldman Sachs’ view on market sentiment and investor positioning was reinforced by Wall Street veteran Ed Yardeni, who emphasized in a report that the U.S. stock market may be “too bullish” and that highly bullish sentiment could be a warning sign.

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