Accidentally "bursting" data suddenly becomes a risk event.
The U.S. stock market was "frightened" by the bursting employment data, and expectations of aggressive interest rate hikes quickly heated up. On July 6, local time, the US ADP employment report showed that the number of private sector employment in the United States increased by 497,000 in June after seasonal adjustment, more than double the market expectation of 225,000 and far exceeding the previous value of 278,000. The largest monthly increase since July 2022.
After the release of the data, the global financial market trembled, among which, the most violent reaction was the US Treasury market, the interest rate-sensitive US 2-year Treasury bond yield once rose above 5.10%, the highest level since June 2007; the three major indexes of US stocks collectively opened low and went low, the Dow fell by more than 500 points intraday, as of the close, the Dow fell more than 1%, the NASDAQ fell 0.82%, and the S&P 500 fell 0.79%. In addition, European stock markets also collapsed across the board, with the European Stoxx 600 index falling by more than 2%, major European European stock indexes falling together, French stocks falling by more than 3% to lead the European market, and Germany, the United Kingdom, Italy, and the Netherlands all fell by more than 2%.
The unexpected "explosion" of the job market has sharply raised hawkish expectations from the Federal Reserve. On July 6, local time, Dallas Fed President Logan said that he was very worried about whether inflation could cool down quickly, and it may be necessary to raise interest rates further. In addition, Goldman Sachs advised investors in its latest report to prepare for the possibility that the US stock market could suffer more than 20% losses in the coming months due to a potential recession.
Completely exploded
On July 6, local time, the US ADP employment report showed that the number of private sector employment in the United States increased by 497,000 in June after seasonal adjustment, more than double the market expectation of 225,000 and far exceeding the previous value of 278,000. The largest monthly increase since July 2022.
ADP chief economist Nela Richardson said the consumer-facing services sector had a strong performance in June, driving higher-than-expected job creation. But wage growth in these industries continues to weaken, and hiring could peak after a late-cycle surge.
By sector, leisure and hospitality led the private sector with 232,000 new employees, followed by construction with 97,000 and trade, transport and utilities with 90,000.
This suggests that the US labor market showed no signs of slowing down in June, with businesses creating far more jobs than expected.
Financial markets shook after the release of ADP employment data. Among them, the most violent reaction was the US Treasury market, the US bond collection rate rose sharply, the interest rate-sensitive US 2-year Treasury bond yield once rose above 5.10%, the highest level since June 2007; the US 10-year Treasury bond yield once rose above 4.08%, refreshing a four-month high, by the end of the bond market was about 4.03%, up nearly 10 basis points in the day.
The U.S. stock market suffered a dive, the three major indexes collectively opened low and went low, the Dow fell by more than 500 points in the session, and the midday decline narrowed, as of the close, the Dow fell more than 1%, the NASDAQ fell 0.82%, the S&P 500 fell 0.79%, chips, AI, Chinese concept stocks underperformed the market, and the Nasdaq China Golden Dragon Index fell 3.04%.
Wall Street analysts pointed out that the explosive job market indicates that the risk of inflation in the United States may rise again, and the market's concerns about further aggressive interest rate hikes by the Federal Reserve are rising.
In addition, European stock markets also collapsed across the board, as of the close, the European Stoxx 600 index fell by more than 2%, major European European stock indexes fell together, French stocks fell by more than 3% to lead the European market, and Germany, the United Kingdom, Italy, and the Netherlands all fell by more than 2%.
The European government bond market also suffered a heavy setback, and yields accelerated after the release of the US "small non-farm" employment report, among which the UK 10-year benchmark government bond yield once touched 4.70%, refreshing the intraday high since October 2008; The yield on the 2-year British bond rose above 5.50% at one point, hitting an intraday high since 2008.
Expectations of a rate hike in the European market are also heating up, with investors fully pricing in another 50 basis point rate hike by the Bank of England in August.
It is worth mentioning that on Friday evening, the US Department of Labor will release the non-farm payrolls report, which the market is more concerned about. After adding 339,000 people last month, the current market expects an increase of 240,000 this month, and once the data exceeds expectations, it will again become a market risk event.
The latest voice from the Federal Reserve
The unexpected "explosion" of the job market has sharply raised hawkish expectations from the Federal Reserve.
On July 6, local time, Lorie Logan, the 2023 FOMC voting committee and president of the Dallas Fed, said that he was skeptical of the significant impact of the lagging effect of interest rate hikes; Stricter policies are needed to achieve the objectives of the FOMC; There are very concerns about whether inflation can cool quickly, and further rate hikes may be necessary.
The minutes of the Fed meeting, released just the day before, showed that almost all officials expect more rate hikes in 2023 to continue the fight against stubborn inflation. Proponents of a rate hike point to a tight labor market, a stronger economy than expected, and no evidence that inflation will gradually return to its 2 percent target.
The just released labor market data also confirms the Fed's concerns, which will strengthen the Fed's determination to raise interest rates further. At present, the market is worried about whether the Fed will raise interest rates more often and more than expected this year.
In addition, the minutes also showed that Fed officials were worried that persistently high inflation could push up inflation expectations and weak commercial real estate, and stressed the need to monitor whether tightening credit conditions related to the banking sector would drag down the economy; A few officials believe that the issuance of bonds by the Ministry of Finance may put upward pressure on money market interest rates in the short term; Fed staff still expect the banking impact to lead to a mild recession this year, but believe that avoiding a recession is almost as likely as it is to be a recession.
Goldman Sachs warns
For the US stock market, Wall Street giants are issuing risk warnings one after another. Goldman Sachs advised investors to prepare for the possibility of a more than 20% decline in U.S. stocks in the coming months due to a potential recession.
David Kostin, chief U.S. equity strategist at Goldman Sachs, said in the latest report that some portfolio managers expect a U.S. recession to begin next year, which is in line with the view of most economic forecasters. In this case, the S&P 500 could fall 23% to 3400.
Goldman Sachs believes now is a good time for investors to hedge their portfolios against future losses. Kostin gives 5 reasons in the report:
1. In the case that a large number of investors have already gone long, it may be more difficult for the market to rebound further from now on;
2. A small market rally indicates an increase in downside risk, and historically, sharp declines in market breadth have typically been associated with large declines in the following months, as measured by this metric, which has recently seen its biggest narrowing since the tech bubble;
3. Valuations are high in both absolute and relative terms, with the S&P 500 index having an NTM price-to-earnings ratio of 19 times, the 88th percentile since 1976;
4. The stock market already reflects an optimistic outlook, Goldman Sachs economists expect the average growth rate of US GDP in the second half of 2023 to be 1%, however, measured by the performance of cyclical stocks relative to defensive stocks, the stock market implies that the pace of economic growth is about 2%;
5. Position adjustments are no longer tailwinds for the stock market, and the latest data shows that the U.S. stock sentiment indicator hit a 114-week high, suggesting that capital flows are unlikely to be a driver of the stock market this year.
Goldman's view of market sentiment and investor positions was reinforced by Wall Street veteran Ed Yardeni, who stressed in a note that the U.S. stock market could be "too long" and that high bullish sentiment could be a warning sign.
Responsible editor: Yang Yucheng
Proofreader: Wang Jincheng