Inside the Broker - Payrolls, space, oil, and a large IPO
Inside the Broker
Payrolls, space, oil, and a large IPO
Friday’s US Non-Farm Payroll release showed an increase of 850,000 jobs in June which was well above the consensus forecast of 720,000. It was also a solid improvement on the prior month’s rise of 559,000 which was itself revised up to 583,000. So, overall last week’s data saw payrolls beat official expectations by around 154,000. Now that’s undeniably positive and in certain months this would have triggered a sell-off in equity markets. Why? Because it would have raised fears amongst traders and investors that such a strong pick-up in the jobs data would force the US Federal Reserve to tighten monetary policy sooner than previously expected, particularly against a background of rising inflation. As we have seen over the years, equity markets, particularly the tech and growth stocks, love a low interest rate environment. It means there’s plenty of money available to borrow cheaply and use to invest for future growth. That’s the theory anyway. In truth, there’s plenty of cheap money around, but generally, this is borrowed and spent on things like dividend pay-outs and share buybacks. But that’s fine, as these are two highly effective and efficient methods of boosting a company’s share price, so what’s not to love? We can see this playing out if we look at the S&P 500 and NASDAQ. Both closed out at fresh record highs on Friday, and as far as the S&P was concerned, this marked a run of seven consecutive record closes for the index’s best result in ten months.
So why did investors react favourably to such a strong payroll number? Firstly, while it comfortably beat the official consensus expectation, there had been whispers that it would come in even hotter than expected. The fact that it didn’t was positive. Secondly, while picking up sharply year-on-year, wage growth wasn’t as strong as feared. That took some heat out of inflation fears. Thirdly, despite the pick-up in payrolls, the Unemployment Rate rose to 5.9%, well above the 5.6% expected. Now there’s a positive explanation for this in that more people are willing to come back into the labour market as they become more confident of finding themselves a well-paying job. Also, it probably reflects the fact that people are switching jobs, which again suggests confidence. So, there was a pile of good news out there, but not as good as it could have been. A Goldilocks scenario then. Add to this the fact that the US Federal Reserve still regards the post-pandemic recovery as uneven, pointing to a payroll shortfall of around 6.5 million from pre-pandemic levels to where we stand now. Yes, inflation is a concern, but we know what the Federal Reserve thinks about that, following last month’s Summary of Economic Projections. They expect to raise rates in 2023 by 0.5%. That’s quite a jump from the current level of sub-0.25% but it’s still extraordinarily low, and it’s been priced in already. On this score, we’ll see the minutes from June’s meeting on Wednesday evening. Listen out for what was, or wasn’t, discussed about tapering the bond purchase programme.
What about the rest of the week? There’s plenty of chatter around the Robinhood IPO which was confirmed at the end of last week. This is one of the more heavily anticipated public offerings due to the popularity and controversy surrounding the broker. To read about all this in depth, please look out for our Market Update which we’ll publish on Thursday.
To infinity and beyond
There’s also plenty of interest in three publicity hungry billionaires and their efforts to get into space. While we’ll have to wait a few years before Elon Musk checks out life on Mars, Richard Branson is currently publicising his plans for space tourism as a passenger on Virgin Galactic’s Unity rocket plane next week. If this goes ahead as planned, then he’ll be ahead of Jeff Bezos whose own space mission is due to take off on July 20th, the anniversary of the first moon landing in 1969. Meanwhile, as Jeff Bezos prepares to take one small step, Andy Jassy will take one giant leap as he replaces Bezos on the flight deck at Amazon.
Meanwhile, there were problems at the latest biannual OPEC+ meeting. All members appeared ready to agree to boost supply temporarily by 2 million barrels between August and the end of this year to put a lid on prices. Bear in mind that crude is trading at levels last seen in October 2018. But the United Arab Emirates (UAE) held up the deal, insisting that the baseline for its own production limits needed to be adjusted first. The UAE wants this raised to 3.8 million barrels per day from 3.2 million previously agreed. The dispute went on through Monday and the final meeting was cancelled as OPEC+ members were unable to reach a compromise. The news saw the price of crude rally further as markets were expecting a temporary supply boost which didn’t materialise. But in the longer term there are fears that fractures within OPEC+ could lead to individual oil producers ignoring supply limits and going it alone. If so, then the market could become oversupplied, and this would put downward pressure on prices.
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