[New York Stock Market] Strong Private Employment Raises Tightening Concerns... Dow Down 1.07%

The three major indices of the U.S. New York stock market closed lower on the 6th (local time) as bond yields surged sharply due to stronger-than-expected private employment data. This reflects heightened concerns over the Federal Reserve (Fed), the central bank, not only raising interest rates further but also maintaining high rates for an extended period.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average fell 366.38 points (1.07%) from the previous close to finish at 33,922.26. The large-cap S&P 500 index dropped 35.23 points (0.79%) to 4,411.59, and the tech-heavy Nasdaq index declined 112.61 points (0.82%) to close at 13,679.04.

All sectors in the S&P 500 recorded losses. In particular, energy-related stocks fell more than 2%. Leading energy stocks ExxonMobil and ConocoPhillips each dropped over 3% from the previous close. Meta Platforms fell 0.81% despite news that its new social media platform “Seuredeu,” expected to rival Twitter, surpassed 30 million users in less than a day after launch. Tesla declined 2% after reports that U.S. authorities requested detailed information regarding an Autopilot precision investigation. JetBlue fell more than 7% after announcing it would end its partnership with American Airlines and focus on Spirit Airlines. Meanwhile, salad chain Sweetgreen surged over 15% after Bank of America (BoA) upgraded its investment rating to buy. Genius Sports rose more than 25% after agreeing to extend its strategic partnership with the National Football League.

[Image source=Reuters Yonhap News]

Investors closely watched the ADP private employment data and the resulting bond yield movements released that day. According to private employment data provider ADP, private sector employment increased by 497,000 in June compared to the previous month. This is the largest increase since July last year and more than double Wall Street’s forecast of 220,000. Wage growth for workers slowed slightly to 6.4% from 6.6% the previous month but remained in the 6% range.

These indicators suggest, as Fed Chair Jerome Powell has warned, that the overall labor market remains overheated. Powell has consistently pointed out that achieving the inflation target of 2% requires below-trend low growth and a cooling labor market. John Lynch, Chief Investment Officer at Comerica Wealth Management, told CNBC, “The data exceeding expectations by more than double has heightened fears that the Fed will pursue more aggressive tightening.”

The weekly initial jobless claims released the same day exceeded market expectations but remained at a low level. According to the Department of Labor, new jobless claims for the week of June 25 to July 1 rose by 12,000 to 248,000 compared to the previous week. However, this was only about 3,000 claims above Wall Street’s forecast. Continuing claims for unemployment benefits, which count those filing for benefits for at least two weeks, fell by 13,000 to 1.72 million, marking the lowest level since February. Continuing claims are reported with a two-week lag.

U.S. companies’ layoff plans also decreased. According to the Challenger, Gray & Christmas (CG&C) layoff report, planned layoffs in June totaled 40,709, down 49% from the previous month, the lowest since October 2022. However, the Job Openings and Labor Turnover Survey (JOLTs) showed that private sector job openings in May were 9.8 million, down 496,000 from the previous month. CNBC noted that ADP private employment data tends to be more volatile than other employment indicators, and investors are awaiting the nonfarm payroll report the following day. Mark Hamrick, Senior Economic Analyst at Bankrate, told CNBC, “Economic challenges, including in the labor market, remain uncertain through the end of the year.”

The market widely expects interest rate hikes to resume at the July FOMC meeting scheduled for the 25th-26th. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds (FF) futures currently price in about a 93% chance of a July “baby step” (a 0.25 percentage point rate hike). As Chair Powell has indicated, the possibility of consecutive hikes at the July and September FOMC meetings cannot be ruled out. Terry Sandven, Chief Equity Strategist at U.S. Bank Wealth Management, said in an investor memo, “Strong employment data has increased the likelihood that the Fed will raise rates in July and September.”

Especially if the nonfarm payroll report released the next day shows stronger-than-expected results, tightening expectations around the Fed are likely to intensify. Jeffrey Roach, Chief Economist at LPL Financial, analyzed the ADP private employment data and suggested that the upcoming employment report could also show strength. He said, “Unless Friday’s employment report is significantly weaker than expected, the Fed is unlikely to change its rate hike plans at the next FOMC meeting.”

The minutes of the June FOMC meeting released the previous day clearly indicated that additional rate hikes are expected within the year. Although the final decision was to hold rates steady, it was confirmed that some hawkish members had advocated for hikes during the discussions. Dallas Federal Reserve Bank President Lori Logan confirmed in a speech released that day that she was among the minority who supported a rate increase. She explained that “more restrictive policy will be needed going forward,” but agreed with the final decision to hold rates, saying “it may be reasonable to skip a meeting and move gradually.”

Bond yields surged sharply that day due to stronger-than-expected private employment data. In the New York bond market, yields on 10-year and 2-year Treasury notes both broke through resistance levels of 4% and 5%, respectively. The 2-year Treasury yield briefly soared to 5.12% during the session, surpassing the previous high of 5.121% set on June 15, 2007, marking a 16-year peak. The benchmark 10-year yield also exceeded 4% for the first time since March. Bond yields and prices move inversely.

The dollar index, which measures the value of the U.S. dollar against six major currencies, traded around 103.1, down 0.2% from the previous close. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s “fear gauge,” surged more than 8% to 15.4.

International crude oil prices closed flat amid tightening concerns but on news of declining oil inventories. On the New York Mercantile Exchange, August delivery West Texas Intermediate (WTI) crude oil prices rose 1 cent (0.01%) to $71.80 per barrel from the previous close. Oil prices had fallen more than 2% intraday amid tightening concerns.