Weekly Newsletter June 29th to July 3rd
RECAPPING LAST WEEK
A lackluster showing for the labor market took center stage last week—June’s 57k new jobs number was nearly 50% below expectations, while the previous two months’ figures were revised down by a combined 74k. Meaning that 17k fewer jobs were created over the past quarter than had previously been estimated for April and May alone The unemployment rate ticked down .1% from the 4.3% figure that had persisted for the last several months; while layoffs remain limited, slowing job growth helped push the labor participation rate down to a 5-year low. Before those jobs numbers were released, the Fed Fund Futures had indicated a 40% chance of a rate hike at July’s meeting and 80% for September. Now, those figures have declined to 15% and 60%, respectively, effectively removing one of the expected hikes from 2026. Keep in mind, though, that Kevin Warsh only recently became Fed Chair, and questions remain about his process, so those numbers may be less predictive than they were previously. Warsh’s speech on Wednesday reinforced the 2% inflation target but removed the forward guidance that markets had come to expect from his predecessor, an absence that will take some getting used to. The reduced risk of a rate hike reversed the panic in U.S. Equity indices caused by last month’s report, and pulled the VIX down around 16, near its yearly low. Magnificent 7 stocks reclaimed their market leadership, gaining 6% as a group. Sector performance tilted towards risk as financials, communications, and discretionary sectors led, while risk-off sectors in staples and utilities lagged. Energy fell behind as oil prices slipped to nearly $67 per barrel. For most of the week, the dollar index held strong above $100, until Thursday when it dropped to that important inflection point. Treasury yields ended the week higher thanks to Warsh’s speech, while gold and silver held up at technical support levels. Cryptocurrencies finally caught a bid with Bitcoin, Ethereum, and Solana rising 3%, 7.5%, and 12% respectively. International stocks were mixed as developed markets rose and emerging markets lost ground.
THE WEEK AHEAD
Now that the employment report is behind us, this week’s focus will be on the health of the broader economy and how it might impact Fed policy. FOMC meeting minutes release Wednesday, providing further hints towards our new Chairman’s plans. Just as with Jerome Powell, Warsh’s predecessor, the press conference after the report could be more telling than the report itself and could yield clues about the chairman’s approach to balancing the Fed’s dual inflation/labor market mandate in the face of new data. Any increase in the unemployment claims report on Thursday could help confirm the weakening labor market sentiment indicated by last week’s jobs report. Market watchers expect Monday’s U.S. PMI numbers to show continued industry expansion, and existing home sales and consumer credit reports will arrive later in the week. Canada, where the unemployment rate sits at an elevated 6.6%, will get a jobs update on Friday, and further international inflation numbers from Germany, Japan, and China are scattered throughout the week. Lastly, the ECB’s monetary policy meeting minutes will hit Thursday.
CHART OF THE WEEK
The Flows of Currency
The U.S. dollar index ($DXY) relates the value of the U.S. dollar to six major global currencies: Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), and Swedish Krona (SEK). When $DXY is rising, the U.S. dollar is strengthening against the basket of weighted currencies. Many influences factor into overall currency movements and trends. Macroeconomic conditions reflected through measures of the U.S. economy such as GDP (Gross Domestic Product), CPI (Consumer Price Index), the ISM Manufacturing Index, and employment metrics such as Non-Farm Payrolls often impact $DXY—and the overall stock market—upon release. Historically, there have been periods where the S&P 500 and the U.S. dollar have experienced a statistically significant inverse relationship. The chart below tracks SPX in candlesticks, and $DXY in the purple line year-to-date. The rapid strengthening of $DXY from late January through late March is contrasted with the weakening SPX over that time frame. Then, from early April through mid-May we see the opposite, where SPX’s advance was accompanied by $DXY’s decline. SPX then entered a consolidation phase, forming a symmetrical triangle price pattern from early June. A few volume metrics on SPX show it’s not “overbought” (where the Money Flow Index would be above the 80 level), but neither is it “oversold” (indicated by a reading below 20). Similarly, the Accumulation Distribution reflects low volumes of buying and selling. As of Thursday last week, a small bullish breakout on SPX alongside a drop in $DXY indicates a continuation of the prevailing bullish SPX uptrend.
Source: Charles Schwab Corporation
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