Fears over Fed interest rates grow as job numbers come…

A hotter-than-expected jobs report sent stock index futures and bond markets selling off as investors feared the Fed might now have to be more aggressive in raising rates.

5 minute read

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Key points to remember

  • Hot jobs market raises fears the Fed may not be so dovish after all

  • Investors continue to sift through a slew of earnings reports

  • Despite Friday’s strong jobs numbers, signs are emerging that openings may decline

Shawn Cruz, Chief Trading StrategistTD Ameritrade

(Friday market open) The long-awaited report on the employment situation was published before the market opened and showed that the economy created many more jobs than expected.

Market potential movers

Analysts had forecast non-farm payrolls to increase by 250,000 jobs, from 528,000. The jobless rate fell to 3.5%, significantly below the forecast of 3.6%. In particular, the activity rate has decreased, which has contributed to increasing the unemployment rate. Average hourly earnings rose 0.5% in July and 5.2% year-over-year, above their respective forecasts of 0.3% and 4.9%.

An increase in jobs while GDP is down could suggest that productivity is on the decline. Productivity is an important economic indicator because it is often correlated with increased wealth. Lower productivity will also make it more difficult to lower prices as labor costs are likely to rise.

The 10-year Treasury yield (TNX) jumped past 2.78% as investors fear the boiling job market will prompt the Federal Reserve to be more aggressive in raising rates. The bond market is already increasing the odds of a 75 basis point hike in September.

Stock index futures also fell on fears of potentially more aggressive and sustained Fed rate hikes as the Futures contracts on Dow and Nasdaq Futures Contracts were both down about 200 points each heading into the open.

Adding to rate fears, China is finally responding to President Nancy Pelosi’s visit to Taiwan with sanctions. Beijing is also cutting off some of its communications with the US government. China also launched military exercises around Taiwan and launched missiles over the island, some of which passed over Japan and landed in Japanese waters. However, the Shanghai Composite and the Japanese Nikkei were both higher that day.

In response to reactions from China, CNBC reported that Apple (AAPL) has instructed its factories to re-examine packaging to ensure there is no indication that Taiwan is not part of China, even though Taiwan considers itself a fully sovereign state. AAPL fell 1.36% in premarket action.

Investors have gone through a slew of earnings reports this week and there’s still a lot to do. Here are some moves during the premarket session.

  • EOG Resources (EOG) rose 1.28% despite missing earnings estimates. EOG declared a special dividend and reaffirmed its earnings outlook for the year.
  • DraftKings (DKNG) jumped more than 9% after beating high and low numbers and raising its profit forecast for the year.
  • Goodyear tire (GT) beat earnings and revenue estimates and rose 4.38%.
  • Suncor Energy (SU) beat earnings estimates, but investors may view the results as a good time to take profits as the stock fell 0.75%.
  • To block (SQ) beat earnings and revenue estimates but fell 7.39% as the company suffered a $36 million bitcoin-related loss.
  • Yelp (YELP) smashed its earnings estimate, returning $0.11 a share instead of the fraction of a penny expected.
  • Lyft (LYFT) reported earnings of $0.13 per share instead of an expected loss as the stock was 5% higher.
  • Zillow (Z) beat earnings estimates but fell more than 7% after the company predicted a significant contraction in home sales.

You’re here (TSLA) kicked off its general meeting yesterday. They voted to split the stock 3-for-1. CEO Elon Musk told investors the US was past peak inflation and said component costs were falling. He also predicted a small recession.

Amazon (AMZN) announced its intention to buy i robot (IRBT) with a 22% premium bid to Thursday’s close. The deal could signal an increase in mergers and acquisitions (M&A) as cash-rich companies like Amazon could find a lot of value in stocks that have sold off over the past seven months.

An increase in M&A activity could also boost investment banks like JP Morgan (JMP), Morgan Stanley (MS) and Goldman Sachs (GS) whose capital activities have experienced difficulties until 2022.

Market Minutes Review

The S&P 500® Index (SPX) was essentially flat on Thursday, closing just 0.01% higher. Investors likely felt cautious ahead of today’s jobs report. The Nasdaq ($COMP) increased by 0.41%, but the Dow Jones Industrial Average ($DJI) decreased by 0.16%.

The US dollar index ($DXY) fell 0.70% in response to relatively aggressive 50 basis point rate hikes by the Bank of England (BoE) and the Central Bank of Brazil. The BoE’s hike was the biggest in 27 years as Britain’s central bank tries to contain inflation amid recession fears. Brazil’s monetary policy committee, known as Copom, raised its key rate to 13.75% as the country faces an annual inflation rate of 12.13% recorded in April, a high in 19 years old.

Oil prices continued to fall on Thursday with WTI Crude Futures settling down 2.7% to $88.49 a barrel. Natural Gas Futures Contracts down 2.1% and unleaded gasoline futures fell 4.8%. With such a performance, it is not surprising that energy was the worst performer among the 11 sectors of the S&P 500. Energy Selection Sector Index fell 3.67%.

Investors continued to favor the technology and consumer discretionary sectors on Thursday as yields continued to fall, allowing them to reassess growth stocks even further. The Cash 2 years fell six basis points to 3.04% and the 10-year Treasury yield (TNX) fell seven basis points to 2.68%.

CHART OF THE DAY: UNWANTED HELP? The Job vacancies: Total non-agricultural (JTSJOL:FRED—yellow), known as JOLTS, is still near its highest level in 10 years. However, if the widely followed Jobs, Hirings and Quits survey continues to track the stock performance of the only industrial staffing company in the S&P 500, Robert Half International (RHI—blue), JOLTS could drop dramatically over the next few months. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor, endorse or affiliate with TD Ameritrade. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three things to watch out for

BLOW THEIR SOX: The PHLX Semiconductor Index (SOX) rose another 0.92% in response to positive earnings from Advanced micro-systems (AMD), which jumped 5.93%. The industry group continues to see mixed results and a mixed outlook in earnings reports from semiconductor companies. However, the SOX continues to rise and is now nearly 45% above its July low and less than 5% from its June high.

I OWE YOU ONE: The Federal Reserve Bank of New York’s Center for Microeconomic Data released its “Quarterly Household Debt and Credit Report” on Tuesday, revealing that in the second quarter, total household debt increased by $312 billion or 2% to $16.15 trillion. While all loan balances increased, credit card balances rose 13%, the biggest increase in more than 20 years. In addition, delinquencies increased for all types of debt. The report also showed a sharp rise in foreclosures, but the rise comes as pandemic moratoriums and mortgage forbearance programs come to an end, likely reflecting a normalization in those numbers.

The big banks set aside quite a bit of money for interim loan losses in their recent earnings reports. A study by FactSet showed that higher provisional reserves are often correlated with lower banking income. If problems with chargebacks and foreclosures exceed “normal”, banks could struggle.

CEO OH NO: According to the Business Confidence Survey, business confidence has fallen at a faster pace than real economic activity currently reflects. Extremes of CEO pessimism can be used as a contrary signal, as economic activity often improves after peaks of pessimism. However, it’s unclear whether the pessimism has peaked, so this survey may be worth watching.

Notable Calendar Items

August 8: Earnings from Dominion Energy (D), AIG (AIG), BioNTech (BNTX), Tyson Foods (TSN) and Principal Financial (PFG)

August 9: Gains from Emerson (EMR), Sysco (SYY), Roblox (RBLX), Coinbase (COIN) and Hyatt (H)

August 10: Consumer Price Index (CPI) and earnings of Walt Disney (DIS) and Honda Motors (HMC)

August 11: Producer Price Index (PPI) and earnings of Brookfield (BAM), Illumina (ILMN), Rivian (RIVN) and Cardinal Health (CAH)

August 12: Michigan Consumer Sentiment

good trade,

Shawn Cruz

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