Ear to the Ground

July 07 2023

Markets succumbed to a bout of weakness in the second half of the week, caused by the content of the Federal Reserve Open Market Committee (FOMC) minutes from their last meeting.  The FOMC are responsible for interest rate setting in the US.  Within it was confirmed that, despite the recent pause, that many of the committee members were still in favour of raising rates further this year.  With inflation still well above 2% and the labour market remaining tight there is still a perceived requirement for further monetary policy tightening. 

The reaction of the market was a little surprising, especially given that the Fed Dot Plot, released at the time of the last meeting, which provides an indication of where committee members see rates moving to in the future, suggested that we could see a further two rate hikes before year end.  At the same time, Chair Powell has also been vocal post the meeting that reinforcing the need for rates to go higher.  Perhaps the market didn’t believe him.

There was other US economic data released this week which perhaps added fuel to the fire.  The ISM Services Purchasing Managers Index (PMI) posted a figure a 53.9 for June.  As a reminder, a figure above 50 shows expansion in the sector.  This was well above the figure posted for May (50.3) and also the consensus forecast of 51.  This figure somewhat countered the manufacturing equivalent which was posted earlier in the week.  The ISM Manufacturing PMI for June was recorded at 46, which was lower than both the May reading, and the consensus forecast.  Here there was a decline in new orders and production levels. 

This perhaps highlights that we have a two speed economy operating right now.  During Covid people were unable to enjoy experiences and therefore expenditure went on goods, especially anything which we could order online.  Now it would appear that people are reverting to experiences once again, which ultimately favours the service more than the manufacturing sector. 

This is something which was reflected in the latest ADP Research Institute payroll figures for June.  Overall, the figure was much higher than expected, with private businesses creating 497,000 jobs, way above the 228,000 consensus forecast.  Of those added however, 373,000 were in the services sector, led in particular by leisure and hospitality.  This figure on new jobs, coupled with the higher than expected US service sector activity, undoubtedly fanned the flames for higher interest rates.  At the time of writing, we await the US non-farm payrolls data.  Given the focus of the Federal Reserve on the labour market, a big number here could give rise to further volatility.

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