U.S. equities declined on Friday after strong employment data strengthened the case for the Federal Reserve to continue raising interest rates at a fast pace to tame inflation.
For the month of May, +390k jobs were added against estimates of +318k although lower than the revised higher +436k in April. The unemployment rate remained stable at +3.6%, while estimates had called for a modest decline to +3.5% with year-on-year earnings rising +5.2% as forecast, modestly lower compared to +5.5% in April. The strong employment data adds weight to the view that the Federal Reserve can continue to aggressively raise interest rates with no signs yet that its policy is causing unemployment and potentially engineer a “soft landing” whereby it brings inflation down to target without causing a recession. The next policy meeting is on the 14th and 15th of June and the central bank is widely expected to raise rates by +0.5% at its next two meetings, with an 85% chance of a similar move in September.
The S&P500 declined -1.64% in broad-based selling with 85% of stocks lower and all sectors but energy +1.4% negative, with technology -2.48% and consumer discretionary -2.85% weighing the most heavily. The Dow Jones also weakened -1.05%, as did the Nasdaq Composite -2.47% and Russell 2000 -0.77% while the VIX only edged higher by +0.28% to 24.79. Ahead for the week, the focus in the U.S. is on Friday’s consumer price inflation data forecast to show prices headline prices rose +8.3% from a year earlier while core prices are expected to moderate from +6.2% to +5.9%.
European equities were also lower ahead of an ECB policy meeting this week where it is expected to announce the end of asset purchases in early July, setting the stage for the first-rate hike to follow on July 21st, consistent with recent guidance from ECB President Christine Lagarde. With these steps widely expected, the focus will be on any forward guidance offered as to whether the central bank will implement a gradual lift-off at +0.25%, or a +0.5% increase. Ahead of the policy meeting, the final estimate of Q1 GDP will be released on Wednesday night expected to show the economy grew +5.1% over the year to Q1. The Euro Stoxx 600 finished -0.26% lower on Friday, as did the DAX -0.17%, CAC -0.23% and FTSE100 -0.98% with key benchmarks across the region lower.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set for a lower open this morning with ASX200 futures finishing -0.44% lower on Friday at 7,210. The index gained +0.88% on Friday, pushing the index +0.78% higher for the week with materials +2.62% accounting for most of Friday’s gains supported by a higher iron ore price. CIA rising +8.1%, with BHP also +2.5% higher along with RIO +2.7% and FMG +4.1%. Locally the RBA meeting on Tuesday is in focus with economists forecasting a rate increase of at least +0.35%. According to Westpac chief economist Bill Evans, “the best decision” would be to move by 40 basis points, noting “That would eliminate the emergency stimulus from 2020 and send a clear signal that the board recognises its formidable task to move inflation back within the target band by 2024 and is prepared to act decisively”. The Australian dollar weakened -0.80% on Friday to 0.7207 while the 10-year government bond yield edged -1.6 basis points lower to 3.484%.
Oil rose on Friday as tight markets continue to support prices on concerns around OPEC+’s ability to meet increased production targets. Both WTI and Brent crude finished +1.71% and +1.79% higher at US$118.87 and US$119.72 a barrel. Iron ore futures in Singapore finished +1.66% higher on Friday and are a further +1.65% higher this morning at US$145.05. Gold traded -0.93% lower at US$1,851.19 an oz along with silver -1.71% to US$21.93 with Bitcoin also -1.93% lower at US$29,640 although has modestly risen over the weekend to US$29,925.
Economic data:
- Chinese PMI (MoM May) 11:45
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
