Stocks declined at the opening of trade on Thursday, July 6, 2023 as investors’ concerns over the status of the economy and the trajectory of interest rates intensified in response to better-than-expected jobs statistics.
According to data from payroll processing company ADP, the number of jobs in the private sector climbed by 497,000 in June, the highest monthly growth since July 2022. The increase in June was significantly better than the downwardly revised 267,000 job growth in May and more than double the Dow Jones consensus estimate of 220,000 new jobs.
The official June payrolls report will be released on Friday. The ADP data, which is frequently erroneous and more volatile than other jobs data, is released today ahead of the more reliable official report due out on July 7, 2023. According to Dow Jones, economists anticipate that 240,000 non-farm payrolls were added last month, down from the 339,000 jobs added in May.
Traders may, however, now be anticipating a hotter reading that prompts the Fed to resume its rate-hiking campaign this month after pausing. According to CME Group’s FedWatch program, traders are factoring in a nearly 95% possibility of an increase at the central bank’s meeting this month.
A positive employment report may be detrimental to the stock market since it may indicate that the Federal Reserve (Fed) may raise interest rates more quickly. This is so that the Fed can keep inflation from out of control by raising interest rates, which it usually does when the economy is doing well.
The cost of borrowing money for firms increases as interest rates rise, which may result in slower economic growth. As a result, investors may find equities less alluring as they search for options with higher yields.
A positive job report might also result in increased pay, which will raise the cost of doing business for businesses. Because businesses may be less likely to invest in new initiatives if they are facing higher expenses, this might also result in slower economic growth.
Because higher interest rates and slower economic development can emerge from a positive jobs report, it can occasionally be interpreted as a negative indicator for the stock market. The effect of a positive job report on the stock market, however, might differ based on the precise conditions, so it is vital to keep in mind that this is not always the case.
Here are some examples from the past showing how a positive employment report could harm the stock market:
- More than anticipated, the US economy created 339,000 new employment in May 2022. Due to investors’ concerns that the Fed will increase interest rates more aggressively, this caused a sell-off in the stock market.
- 194,000 new employment were created in the US economy in September 2021, which was also higher than anticipated. Due to investors’ concerns that the Fed might raise interest rates earlier than anticipated, this caused a sell-off in the stock market.
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