Thursday economics: Partly cloudy, 93% chance of September rate cut
Dow edges green, S&P 500 ~flat, Nasdaq modestly red
Energy leads S&P 500 sector gainers; Healthcare weakest group
Euro STOXX 600 index up ~0.1%
Dollar, gold rise slightly; crude dips; bitcoin off >1%
U.S. 10-Year Treasury yield edges up to ~4.17%
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THURSDAY ECONOMICS: PARTLY CLOUDY, 93% CHANCE OF SEPTEMBER RATE CUT
Economic data released on Thursday continued to prime the pump with the market expecting the Fed to initiate its rate-cutting phase as soon as September.
The number of U.S. workers lining up for unemployment benefits USJOB=ECI jumped by 9% last week to 243,000, landing 13,000 to the north of consensus.
It matches a high touched in early June, which was the highest number of initial claims since last August.
The underlying trend, as expressed by the four-week moving average of initial claims, is sideways-to-slightly-upward.
While it's impolite to smile at the sight of longer unemployment lines, signs of a softening labor market - cited by Fed officials as a prerequisite to putting inflation on a sustainable downward path - could cement the shift from a "higher for longer" narrative to "lower and sooner."
Mild weakening in the labor market is likely to make the decision to cut interest rates - likely in September according to CME's FedWatch Tool - easier for Powell & Co.
"Rising claims imply the labor market is cooling at a measured pace," writes Jeffrey Roach, chief economist at LPL Financial. "We learned from the recent Beige Book that businesses are not filling open positions as aggressively as they were in previous months."
"We should expect more cautionary rhetoric from Fed policy makers about the labor market," Roach adds.
Ongoing claims USJOBN=ECI, reported on a one-week delay, increased by 1.1% to 1.867 million, the highest level since December 2021 and well above the pre-pandemic "normal."
The print hints at the possibility that it's taking newly canned workers longer to find a suitable replacement gig.
Turning to the manufacturing sector, the Philadelphia Federal Reserve's Business index (Philly Fed) USPFDB=ECI added 12.6 points to a relatively robust, expansive reading of 13.9, marking its sixth consecutive month in positive territory.
That stands in contrast with Monday's contractive Empire State report.
A Philly Fed/Empire State number greater than zero indicates monthly expansion; below that level signifies contraction.
Beneath the headline, new orders bounded to 20.70 from -2.20 and employment jumped from -2.50 to 15.20.
Prices paid, an inflation predictor, eased 2.7 points to 19.80.
Calling the report "encouraging," Ian Shepherdson, chief economist at Pantheon Macroeconomics notes that "the average of the ISM-comparable components leapt to 12.6, from -5.5, its highest level in over two years."
"We will wait for the release of more of the regional Fed manufacturing surveys before making a firmer judgment about the national picture," Shepherdson adds.
Finally, the Conference Board (CB) released its Leading Economic Index (LEI) USLEAD=ECI for June, which decreased by a shallower-than-expected 0.2%.
The LEI, which aggregates ten forward looking indicators, including jobless claims, building permits, PMI new orders, Treasury yield spreads and S&P 500 index performance, among others, has now decreased for 25 consecutive months.
"The decline continued to be fueled by gloomy consumer expectations, weak new orders, negative interest rate spread, and an increased number of initial claims for unemployment," says Justyna Zabinska-La Monica, CB's senior manager of Business Cycle Indicators. "However, due to the smaller month-on-month rate of decline, the LEI’s long-term growth has become less negative, pointing to a slow recovery."
The LEI has moved in tandem with the S&P 500 (one of its constituents), but that relationship appeared to diverge around October 2022, as seen in the graphic below:
(Stephen Culp)
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Initial claims https://reut.rs/3y0GUE4
Continuing claims https://reut.rs/3WdkCXN
Philly Fed https://reut.rs/468ADmc
Leading economic index https://reut.rs/4bX85xC
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