Cooler Summer: July Jobs Growth Slowed, But Investors Cast Wary Eye On Fast-Rising Wages

(Friday market open) U.S. employers added jobs in June and July at the slowest pace in nearly three years. However, major indexes wavered after the news as investors grappled with stronger-than-expected wage growth.

The U.S. economy created 187,000 jobs in July, the Labor Department said this morning. That’s a slight increase from a downwardly revised 185,000 jobs in June. This pace below 200,000 is the lowest since December 2020, and could imply the jobs machine is finally powering down. That might be welcome news on Wall Street, where sizzling jobs growth earlier this year raised worries that the Federal Reserve would continue hiking rates to keep inflation under control.

The 187,000 growth in July was below analysts’ consensus estimate of 200,000.

Despite lower jobs growth, hourly wages in July rose 0.4%, above the 0.3% consensus. Annual wage growth was 4.4%, versus the expected 4.2%.

Morning rush

• The 10-year Treasury note yield (TNX) rose 1 basis point to 4.2%, the highest in nine months.
• The U.S. Dollar Index ($DXY) was steady near 102.34.
• Cboe Volatility Index® (VIX) futures were flat near 15.89.
• WTI Crude Oil (/CL) rose 0.5% to $82.01 per barrel.

Just in

July’s lighter-than-expected jobs growth was accompanied by downward revisions to May and June by the Department of Labor—a sign that hiring has abated more than previously thought. The government lowered the two months by a combined 49,000 jobs.

• The health care industry added by far the most workers of any sector in July, the Labor Department said. Construction also trended higher, adding 19,000 jobs. Leisure and hospitality, which led hiring for many months, has slowed recently and added 17,000 positions in July.
• Despite moderating leisure and hospitality growth, the services sector continued to run hot in July. Health care and private education combined added 100,000 jobs, up from 71,000 in June. Wage growth for the goods sector came in the same as in June, up 0.6% month-over-month; growth for the services sector was also unchanged from June at 0.4% month-over-month.
• July marked the eighth month in the last nine of contracting payrolls for temporary employment—a key indicator for broader job growth. The July data also pointed to more people leaving jobs, implying a higher “quits” rate that’s normally seen in a healthy jobs market.

Taking a broad view, the report may be in the “not too hot, not too cold” category. Lower jobs growth and fewer average hours worked were dovish from an interest-rate standpoint, offsetting the drop in unemployment to 3.5% in July from 3.6% in June and the rise in wages growth.

Stocks in Spotlight

Mixed on megas: Apple (AAPL) and Amazon (AMZN) shares went their separate ways after the two mega-caps reported earnings late yesterday. Apple shares were down more than 2% in premarket trading early Friday, while Amazon stock rose more than 8%.

Amazon rebounds: Amazon’s results looked solid across the board. Revenue and earnings per share (EPS) beat Wall Street’s average estimates, but it was the data deeper down that caught investors’ eyes. Stronger-than-expected earnings from cloud business Amazon Web Services (AWS)— a heavy profit generator—stood out, as did company-wide revenue guidance that exceeded the average Wall Street range. A 12% year-over-year rise in AWS sales was a positive surprise, as many analysts had expected single-digit growth. Third-party seller revenue also exceeded analysts’ expectations, though online store sales came up a bit short of analyst forecasts.

The response rally by Amazon shares was a bit of a departure, considering the company’s stock had only risen on four of its last 16 earnings response days.

Less shiny Apple? Apple’s quarter was more of a mixed bag, and the initial market response reflected that. Like Amazon, the company delivered EPS and revenue that beat Wall Street’s average forecasts, and the margin-leading Services segment also did better than expected. That might have helped Apple’s gross profit margins, which reached a 10-year high. Strength in the Mac business also is worth noting; perhaps it’s another sign of recovery for the personal computer (PC) industry.

• Despite those highlights, shares initially headed lower as investors digested a revenue miss for the iPhone. One caveat is that the June quarter historically tends to be the worst of the year for iPhones because many prospective customers might wait to buy until the fall, when Apple typically introduces a new version of the device.
• In addition, this marked the third consecutive quarter where Apple’s overall revenue declined year-over-year, though the drop of 1% was a bit less than expected. Sales in China improved from the same quarter in 2022, but the bar was low because that was a very soft period marked by COVID-19 shutdowns in that market. The company’s earnings call didn’t do much to raise spirits, as Apple predicted that revenue would continue their downward trajectory this quarter.
• Following the Amazon and Apple results, Amazon received an upgrade from brokerage Rosenblatt Securities, which called the quarter “constructive” and several price-target increases. But Rosenblatt downgraded Apple, saying its mixed earnings report “highlights the slowdown phase in which Apple now sits.”

What to Watch

Next week’s data calendar will reward patience. Two of the most closely watched monthly data points will be released on Thursday and Friday: The July Consumer Price Index (CPI) and the July Producer Price Index (PPI), respectively.

With these indicators, one thing to watch is year-over-year growth, which might look swollen compared to the cooler readings in June. That’s because comparisons aren’t as easy, as annual CPI peaked in June 2022 at above 9% and improved after that.

On the earnings front, things are winding down following the last two weeks when a combined two-thirds of S&P 500 companies reported. Perhaps the most prominent company expected to report next week is Walt Disney (DIS), scheduled after the close on Wednesday. Others to watch include UPS (UPS), Under Armour (UAA), Eli Lilly (LLY), and Lyft (LYFT).

Eye on the Fed

Futures trading indicates a 17% probability that the FOMC will raise rates at its September meeting, according to the CME FedWatch Tool. The probability for November is 31%. Neither number changed appreciably after the jobs data.

CHART OF THE DAY: KEEPING UP WITH THE JONESES. After a decade where the 10-year U.S. Treasury yield (TNX—purple line) held a nearly constant premium to the fed funds rate FRED, this year’s rate hikes finally gave fed funds a slight premium to the 10-year yield. However, the recent rally in the 10-year yield to above 4% suggests this particular race isn’t over. Data sources: Cboe, FRED database. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

New VIX paradigm? It’s no secret that S&P 500 volatility surged this week after Fitch Ratings downgraded U.S. credit, and the government released strong economic data, raising inflation fears. The Cboe Volatility Index® (VIX)—which was near a three-year low around 13 recently—powered to above 17 intraday Thursday after closing above 16 on Wednesday. The VIX had chopped around between 13 and 15 most of the summer, but a new range to watch might be between 16–18, says Joe Mazzola, director of trader education at the Schwab Center for Financial Research. The 16 level marks a point VIX hadn’t been above since June 1, when the debt ceiling deal was reached, and marked a strong technical support level in April and May. Looking to the coming months, VIX futures trade in contango, meaning contracts further out are priced above the spot level, reaching 18 in September and 19 in December. This still puts VIX below its historic average of 20. Even the current 16–18 range doesn’t imply dramatic near-term stock market choppiness.

Yield sign: Speaking of ranges, the 10-year Treasury note yield (TNX) burst out of its old range of between 3.7% and 4% this week, reaching its highest level since last November above 4.18% on Thursday. This alarmed investors, who shied away from growth-oriented stocks and small-caps fearing that rising borrowing costs could hurt both. Rising yields also could reflect investors gravitating toward perceived safety after the Fitch downgrade, as well as an injection of new supply by the U.S. government and a sharp rise in Japanese yields. Whatever the reason, there is potential resistance just above current levels. Last October’s closing high near 4.23% is one place to watch. The intraday high of 4.33% reached last October is the next step up the ladder and the strongest resistance, says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. For anything higher, you’d have to go back more than 15 years. Some experts say not to dismiss that as a possibility.

Watching the curve: As yields on the 10-year Treasury note ascended, they gained ground on the 2-year Treasury note yield, narrowing their inversion to around 70 basis points from more than 100 last week. An inverted yield curve—where shorter-term yields hold a premium to longer ones—often preceded past recessions. But some analysts say a narrowing inversion can be an even bigger warning sign because it implies rate cuts ahead to jumpstart a lagging economy. In other words, when the curve narrows, it might suggest a recession in the very near-term. This time around, it’s not so clear. First, CME futures don’t predict rate cuts before next March. That’s arguably too far away to imply the market pricing in imminent recession risk. In addition, FOMC members are still much more concerned about the upside risk of inflation than the downside risk of recession, says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research.

Calendar

Aug. 7: June Consumer Credit and expected earnings from Palantir (PLTR) and BioNTech (BNTX)

Aug. 8: Expected earnings from Eli Lilly (LLY), Fox Corporation (FOXA), UPS (UPS), Lyft (LYFT), Wynn Resorts (WYNN), and AMC Entertainment (AMC)

Aug. 9: Expected earnings from Walt Disney (DIS)

Aug. 10: July Consumer Price Index (CPI and core CPI and expected earnings from Alibaba (BABA)

Aug. 11: July Producer Price Index (PPI), core PPI, and University of Michigan Preliminary August Consumer Sentiment

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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