The unemployment rate keeps going up, but the economy keeps adding jobs. That's the odd position we've been in for months now, after the June jobs report showed the U.S. adding another 206,000 jobs, but the unemployment rate rising again to 4.1%.
Opinion is still pretty divided on whether we're heading into a broad economic slowdown or not. What's more clear is that either way, the Fed is probably keeping rates higher than they ought to be. "This is not a close call," wrote Renaissance Macro on X after the report. "Conditions in the labor market are cooling off," as payroll growth has slowed to 177,000 the past three months on average, versus nearly 300,000 a year ago.
"If they don't cut this month, they ought to make a strong signal a cut is coming in September," RenMac wrote. The Fed's next meeting is on July 30-31, and markets are currently only pricing in a 5% chance of a cut then. "The labor market is still healthy, but...restrictive policy is taking its toll," wrote economist Julia Coronado. "With inflation also cooling there is no need to keep nominal rates pegged at 5.5%"
This follows Wednesday's ISM services report, which unexpectedly dove into contraction, with a reading of 48.8 (50 being the dividing line between the sector expanding or not). Manufacturing meanwhile--which bulls were hoping would return to growth after years of post-pandemic contraction--remained below 50 for the third straight month, we learned on Monday.
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And yet the stock market has continued to move higher in the face of such data this year. Perhaps investors expect rate cuts will ultimately help keep the business cycle going. Or perhaps the AI innovation cycle is distorting things. As Piper Sandler's Michael Kantrowitz wrote Friday in dropping coverage of the S&P 500, "'The Market' no longer represents the stocks IN the market."
The 10 largest stocks now comprise 37% of the S&P 500, he noted (versus less than 25% pre-pandemic), while correlations are at a record low for the data going back twenty-plus years. "Is having a [price] target on the S&P 500 really that helpful if only a handful of stocks are representing that?" he asked.
All of the big tech stocks, of course, are benefitting from the rise of AI. Some directly because of their cloud business; some because they sell hardware and software that can add these features; and others because AI will help them sell more and better ads, or aid their hopes of creating self-driving cars and robotaxis.
Money Report
Even the non-tech stocks doing well this year (utilities, data centers, etc.) in many cases stem from the need to build out and support AI capabilities. So is the AI boom masking the broader weakness that we see in the business cycle right now? Or, to borrow a phrase, is AI now the business cycle? If only the Federal Reserve could set one policy rate for them, and another--much lower one--for everybody else.
See you at 1 p.m!
Kelly
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