The week in the markets –
July 7, 2023

Recession fears persist, despite strong equity markets and jobs data

• The ISM Manufacturing Index has shown continued contraction for eight consecutive months.
• The Federal Open Market Committee releases June’s meeting minutes.
• The U.S. added over 232,000 jobs in June.

The ISM Manufacturing Index, a key barometer closely monitored by investors and analysts, was released this week. The June data revealed a continued contraction in manufacturing for the eighth consecutive month. The index dropped to 46.0, its lowest point since 2020, underscoring the ongoing challenges faced by the manufacturing sector and suggesting economic softness in the coming months.

In tandem with the ISM Manufacturing Index, the Fibre Box Index, a lesser known but interesting metric, provides insights into the shipment of corrugated boxes across the U.S., represented in billions of square feet. It serves as a leading indicator of packaged goods ready for shipment and is closely correlated to the manufacturing sector. The 12-month moving average for corrugated box shipments has declined to 7.8 billion sq. ft, a 6.6% drop from its peak of 8.4 billion in August 2021. This decrease suggests a considerable reduction in the movement of manufactured goods and finished orders.

Apple hit an unprecedented milestone, with a $3 trillion valuation, as measured by market capitalization. This achievement is a testament to the company’s commitment to innovation and becoming rooted in our everyday interactions. As of the second quarter of 2023, iPhones account for over 54% of Apple’s topline revenue. Listen to the Living Market podcast for more on what it takes to become a trillion-dollar company.

The U.S. unemployment rate declined to 3.6% due to an increase in payrolls and a drop in the labour force participation rate. Data from both the Bureau of Labor and Statistics and Automated Data Processing showed resilient job creation, with gains in construction, education, mining and trade. However, the manufacturing sector shed jobs, which is in line with manufacturing data (and consumption metrics) showing a greater share of spending on leisure and experiences since the beginning of the year.

The chances of a recession have been on the minds of investors for some time, but you might not think so, given the service and hospitality sectors’ jobs data and positive equity markets. Our view remains that inflation is steadily coming down, albeit at a slower pace than central banks would like. We’re expecting the effect of interest rates and tighter financial conditions to resonate in the latter half of this year and that central banks are close to being done with restrictive rate policies.

The Federal Open Market Committee (FOMC) shared minutes from its June meeting, shedding light on the varying perspectives among members regarding the economic forecast for the second half of 2023. Despite a significant increase of 500 basis points in interest rates over the previous year, the majority of members maintain a positive outlook on the economy's robustness. Looking ahead, the FOMC strongly suggests a hike in the upcoming meeting (after a June skip) and room for another increase in the fall.