U.S. job market remained ‘exceptionally’ strong in July: what does it mean for stocks?

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S&P 500 closed roughly flat on Friday after the Bureau of Labour Statistics said the job market remained exceptionally strong in July.

How does that fit into the recession debate?

The U.S. economy added 528,000 jobs last month – more than double the Dow Jones estimate. Still, Saira Malik (Chief Investment Officer at Nuveen) is convinced it’s not enough to avoid a recession. On CNBC’s “Squawk Box”, she said:

Strong dollar is a headwind for earnings. Another risk is rates continue to go up. Just because we have strong employment number, that’s likely not enough to hold up an economy if the other two pieces, consumer and earnings start to crack.

Unemployment stood at 3.5% in July; 10 basis points lower than expected, while average hourly earnings went up 5.2% year-over-year and painted a rather gruesome picture of inflation that already sits at a multi-decades high of 9.1%.

The benchmark index is currently up 13% from its low in mid-June.

What does it mean for the stock market?

The economic news this morning, as per Malik, increases the probability that the central bank will opt for another 75-bps hike in September, thereby creating trouble again for the U.S. equities. She noted:

I think the market got overly optimistic and thought the Fed pivoted last week. We don’t think they did. I think Fed continues to raise rates and markets are now trading at above average valuations. That’s a risk more to the downside.

Malik reiterated that the Federal Reserve won’t shy away from pushing the economy into a recession so long as it cures inflation.

U.S. has already had two consecutive quarters of negative GDP; so, the “technical” definition of a recession has been satisfied, even though the National Bureau of Economic Research (NBER) hasn’t officially declared one.  

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