The Week That Was
The government’s household survey shows the unemployment rate at 4.1 percent, up from 3.6 percent a year ago. The report also shows a decline of 675,000 private-sector jobs since the peak in November 2023.
Downward revisions to payroll data show June private payrolls continued to slow from 200,000 three months ago to 150,000 in June.
Mixed reports for the June ISM and S&P business surveys make it difficult to gauge the economy. The more popular ISM survey has the service sector and new orders declining. The overall reading (49), new orders (47), and jobs (46) signal the economy is in a downturn (at least for June).
The S&P business survey, by contrast, finds June overall activity and new orders were booming. Both surveys show manufacturing close to break-even.
Initial unemployment claims in the past four weeks were 238,500, up from 213,000 in the year ending in May. This number is highly erratic (it reached 253,000 in June, 2023), so the recent increase is not significant.
Things to Come
The big news this coming week is Thursday’s June Consumer Price Index. The Cleveland Fed anticipates the overall CPI will be 0.07 percent, while the core CPI will be 0.23 percent.
If that is correct, the important year-over-year rates will remain at 3.5 percent and 3.75 percent, respectively. These are not enough to give the Fed confidence its fight against inflation is over.
Market Forces
The bulls got a second breath this week, sending the S&P500, Nasdaq, and QQQs to new all-time highs. Interest rates rallied to the vicinity of their 50-day averages before reversing back below it.
Our fundamental stock market model shows the S&P500 overvalued by 37 percent. Even so, our short-term directional model points to an 80 percent probability the bulls will continue to run.
Economic news points toward a slowdown. The Atlanta Fed model, which at one point estimated second quarter real growth at 4 percent, now has an estimate of 1.5 percent.
More dramatic is the decline in the ISM business survey for service companies. It signals a
downturn in June.
However, before getting too carried away with the ISM survey, the alternative (though less reliable) S&P business survey has the economy booming in June. Most surveys, along with our own research, say inflation remains a problem.
The next key inflation report is due out next week. The Cleveland Fed model anticipates very good news, as noted above. If so, it will reignite calls for interest rate cuts. However, with oil prices surging to $84 and with business surveys showing inflation remains a problem, we do not expect a near-term cut in interest rates.
Outlook
Economic Fundamentals: strong positive
Stock Valuation: S&P 500 overvalued by 37 percent
Monetary Policy: restrictive
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