SPY SPDR S&P 500

The U.S. benchmark indices posted mixed performance in the last five trading sessions but ended the week in the green. Strong jobs reports and falling global crude oil prices weighed on the S&ampP 500 index (AMEX: SPY) and Nasdaq Composite, which declined marginally on Friday. The Dow Jones Industrial Average index, on the other hand, lost 0.13% last week.  

Strong jobs report 

The U.S. labor market has remained sturdy despite the global economic slowdown and recession concerns. The economy added 528,000 non-farm payroll jobs last month, higher than the consensus estimate of 250,000 jobs. 

July marked the 19th consecutive month of non-farm payroll expansion, with the U.S. achieving full labor market recovery since the pandemic. Also, the unemployment rate in the economy fell by 10 basis points month-over-month to a pre-pandemic low of 3.5%.   

Recession concerns loom large

This impending recession will be like no other. While strong macroeconomic data such as better-than-expected jobs reports and consumer spending reflects economic resiliency, it also signals a more aggressive Fed stance. 

Analysts and traders are now expecting an “unusually large” rate hike in September, as the economy remains red-hot despite two consecutive 75-basis point rate hikes over the past few months. This comes as U.S. GDP declined for two consecutive quarters in the first half of 2022. 

Around 68% of traders now expect the Fed overnight funds rate to be in the 3%-3.25% range. This could potentially eliminate the chances of a “soft landing,” as the Fed is poised to implement a third 75-basis point hike next month, marking the fastest rate hike in more than a generation. 

Regarding this Jim Baird, chief investment officer at Plante Moran Financial Advisors said, “The fact of the matter is this gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession … It’s not going to be an easy task to continue to tighten without negative repercussions for the consumer and the economy.”

Declining oil prices 

In other news, oil prices dropped sharply last week, signaling a global economic slowdown. On August 4, oil prices dropped to their lowest levels since the Russian invasion of Ukraine, as U.S. crude oil inventories remained unexpectedly high. The U.S.-benchmark West Texas Intermediate crude futures closed below $90 per barrel last week, marking a weekly decline of 9.74%. Moreover, as OPEC+ is gearing to raise output in September, the oil price weakness is expected to continue in the near term. 

The declining oil prices are one of the key indicators pointing towards recession. The economy’s manufacturing output declined sequentially last month as well, due to weaker demand. 

Bottom line

The U.S. Treasury yield curve has remained inverted for a month straight – another parameter signaling a recession. In fact, the difference between the 2-year and 10-year treasury yields is at the widest level in 22 years since the dot-com bubble.  

Thus, even with a strong jobs report, the U.S. is inevitably headed toward a recession. Markets are now keenly awaiting the July Consumer Price Index scheduled to release next week, which would point out whether inflation rates are cooling.

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