Fear of interest rates stock market traders
US labor market data better than expected
7/6/2023 6:46 p.m
The leading German index is making losses for the fourth day in a row. Fresh labor market data from the USA are increasing concerns that the Fed will soon be raising interest rates again. A sentiment barometer for the American service sector also supports this assumption.
Strong employment data from the USA have significantly accelerated the downward trend on the German stock market. The DAX extended its minus and closed 2.57 percent weaker at 15,528.54 points. That means the fourth day of losses in a row and also a three-month low. The MDAX for medium-sized companies fell by 2.64 percent to 26,708.44 points.
Analyst Craig Erlam from broker Oanda spoke of another heavy blow to hopes of a longer interest rate pause by the US Federal Reserve. If a further interest rate hike was not already certain at the end of July, then this is probably the case now. The experts at Landesbank Helaba added that the unexpectedly significant improvement in sentiment in the US service sector should also make it easier for the Fed to raise interest rates again. At the European Central Bank (ECB), the signs are pointing to further increases in key interest rates.
US private sector employment rose much more than expected in June. As the job market service provider Automatic Data Processing Inc. (ADP) reported, 497,000 jobs were created compared to the previous month. Economists had only predicted an increase of 220,000 jobs. A total of 267,000 jobs were added in May, 11,000 fewer than originally reported.
“Consumer-related service industries had a strong June, driving job creation faster than expected,” said Nela Richardson, chief economist at ADP. “But wage growth continues to ebb in these industries and hiring is likely to be dead after a late-cycle surge.” The ADP report is based on around 500,000 US companies with around 25 million employees and is considered an indicator for the official jobs report, which will be released on Friday. The ADP report includes only employment in the private sector, while the official report also includes the government sector.
Two more rate hikes by the end of the year
US service providers also did surprisingly well in June. The purchasing managers’ index for the sector rose 3.6 points to 53.9, according to the Institute for Supply Management’s (ISM) monthly survey. Economists had only expected an increase to 51.0 jobs. The barometer is now well above the growth threshold of 50 points again. The service providers account for more than two thirds of the gross domestic product of the world’s largest economy.
Despite the improvement in demand, inflation in the services sector weakened again. The barometer for the prices paid by companies for intermediate services fell by 2.1 to 54.1 points. That’s the lowest level since March 2020. It bodes well for the Fed’s efforts to bring inflation closer to the 2 percent target. Many Americans are suffering from a loss of purchasing power in the face of persistently high inflation.
The development of personal consumer spending – a measure of inflation that the Fed pays particular attention to – has recently shown a easing of price pressure. This so-called core PCE index – which excludes fluctuating food and energy costs – fell from 4.7 to 4.6 percent in May. The Fed has raised interest rates from almost zero to 5.00 to 5.25 percent since March 2022. They want to use it to catch inflation.
According to their boss Jerome Powell, most decision-makers at the central bank are assuming at least two further interest rate hikes by the end of the year. The reasons for this are persistently high inflation and the tight labor market. Powell said there is still a “long way to go” to bring the inflation rate back to the target of two percent.