Markets and Interest Rates Rise The First Week of July

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The S&P 500® started the quarter on the up, with a gain 2% last week. Many are calling last week’s rally a bear market rally as inflation and recession worries still dominate investors’ worries. Friday’s non-farm payrolls showed no signs of cooling in the U.S. labor market. Employers added 372,000 jobs in June, a huge surprise compared to the 276,000 economists’ estimate. Economists had expected job growth to slow sharply last month given the broader signs of economic weakness, but June showed a robust gain, continuing the trend from the previous two months. Another surprise was that the unemployment rate remained 3.6% for a fourth straight month, matching a near-50-year low that was reached before the pandemic.

In response, interest rates swiftly moved to price in a steeper Fed rate hike trajectory ahead. While a robust jobs environment might be good for the economy, it implies the Federal Reserve will need to raise interest rates even faster to dampen inflation.

Outside of the US there are some positive signs that other economies will improve, reducing supply chain issues and global growth. China lockdowns are easing and there is even discussion of stimulus. Also, many emerging markets are likely to benefit from an expensive USD, currently at 20-year highs. An expensive US dollar means that exported commodities, typically priced in US dollars, are worth more in local currencies, boosting the local economies.

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