July 7th, 2023

Economic Conditions Will Push The Fed To Raise Rates

The market is once again confused about where it should be headed as manufacturing is showing contraction, but economic data is showing that jobs are better than expected. That all but solidifies future rate hikes as the Fed battles its way to a soft landing.

Will another rate hike be enough to send the bulls running? What was the cause for the early morning sell-off and the run to defensive sectors? What is behind the hiring?

Let’s start by first looking at the state of Manufacturing and Services. A reading below 50 means a state of contraction and we can see that the ISM Manufacturing Index is nearing 45. We haven’t seen this low of readings since the Financial Crisis in 2008 and the Covid Crash of 2020.

If the market is starting a new bull market, then the economic cycle should be close behind and that would mean we should start to see some improvement in manufacturing.  That hasn’t happened yet.  

But here’s where it gets confusing. If Manufacturing is going downhill, why did the ADP Jobs Report rattle the markets? The private sector added 497,000 jobs in June, which is way above the 220,000 forecast.

The strength of the jobs market continues to defy expectations. While wage inflation has leveled off, we are now seeing ‘labor hoarding’ where companies are maintaining headcounts despite softening demand. We’re also seeing the Baby Boomers aging out of the workforce so companies are acquiring talent and trying to prepare for the next economic move.

If you cut your workforce too deep and we do get a soft landing from the Fed, the fear then becomes that a company will be behind its competition. There’s also some buzz about a rotation in the workforce as companies are hiring those who will be willing to work in the office and will eventually go through another round of layoffs once the new employees are up to speed.

Either way, the FOMC meeting minutes showed that many governors were reluctant to pause rate hikes and they are more likely to push for rate hikes now after strong economic data.

The market has been more defensive to start the third quarter as investors try to determine which rate hike will be the proverbial straw that breaks the camel’s back.

Only the defensive sectors like Utilities (XLU) and Staples (XLP) are in the green since the start of the 3rd quarter.

Today’s trade is ripped out from the headlines of the battle between Zuckerburg and Musk. Meta (META) launched its version of a Twitter competitor and overnight had over 30 million new subscribers. Now the lawyers get involved as Musk is accusing Meta of poaching talent and stealing intellectual property. Of course, Musk is conveniently forgetting that he laid off most of the Twitter employees when he bought the company.

Anyway, META has been one of the companies driving the market higher in 2023 and they now have a new product they can push for an additional stream of revenue that is much less expensive to launch than the Metaverse.

I can’t wait to see the giants of industry duke it out for ego supremacy.
In the meantime, I’m looking at selling the 21 JUL 280 put and buying the 21 JUL 275 put for a credit of around 1.00 – 1.15 (using pre-market prices).

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 

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