June jobs creation of 224,000 is a hefty boost from the downwardly revised 72,000 jobs added the previous month and tempers some expectations about a Federal Reserve rate cut later this month.
Nonfarm payrolls report comes in at 224,000, well above expectations
Strong jobs number pressures gold futures
Trading volumes may be light today
(Friday Market Open) You could think of today’s trading like a burger you might have had at a BBQ yesterday. It’s a meaty day of data sandwiched in between the Independence Day holiday and the weekend.
Though many investors are likely to use the Thursday holiday as a reason to take an extra-long weekend, there is one key bit of news to chew on today: the government’s monthly nonfarm payrolls report.
The headline number came in at 224,000, well above theBriefing.com consensus expectation for 160,000 jobs to be created. The new number is a hefty boost from the downwardly revised 72,000 jobs added the previous month.
The strong June figure may help temper some expectations about a Federal Reserve rate cut later this month. After the data came out, the futures market indicated increasing expectations for a rate cut of 25 basis points and decreasing forecasts for a cut of 50 basis points.
Even though the futures market was still showing a certainty of a rate cut, stock market futures extended the morning’s losses as investors appeared to walk back some expectations of a dovish rate move by central bankers.
If that move continues into the trading day, it would be a case of strong economic data actually sending stocks lower, reversing a trend we saw in the last trading session.
On Wednesday, June payrolls data from ADP and Moody’s Analytics showed that private companies added 102,000 jobs. That was considerably lower than the 145,000 expected in a Briefing.com consensus.
So, with that sobering data ahead of today’s important government jobs report, why did each of three U.S. stock indices—the S&P 500 (SPX), Dow Jones Industrial Average ($DJI) and Nasdaq (COMP)—finish Wednesday in the green? Three words: Interest rate expectations.
The weak ADP/Moody’s data appeared to feed into expectations that the Federal Reserve could cut interest rates later this month. The data also came during a week where factory orders were weaker than expected.
The rate-cut expectations seem to have boosted stocks on hopes of lowered borrowing costs for corporations as well as consumers who might want to buy homes or automobiles.
Still, this situation is a double-edged sword because while a slowdown in economic growth could lead to a Fed rate cut, it isn’t a great scenario for corporate profits and job security that can help bolster consumer confidence.
Perhaps that dichotomy is also behind why Consumer Staples and Real Estate outperformed the other S&P 500 Index (SPX) sectors on Wednesday. These sectors are often considered defensive and can move in the opposite direction to the wider market. But on Wednesday they moved in the same direction, just more so.
The Real Estate sector is also sensitive to moves in the bond market. So the sector probably got some additional help Wednesday as the benchmark 10-year Treasury fell to its lowest point since November 2016. Lower bond yields can make dividend-yielding bond proxies like Real Estate more attractive. Plus, lower yields at the back end of the curve can lower mortgage rates, and thus increase the buying power of home buyers.
But again, when the employment data came out this morning, the market looked to be reversing that trend to some degree.
But some investors may be wondering whether bond yields tend to move inversely with stock prices. Often, that can be the case, but this time around, it seems to be a sign that slowing economic growth could send investors into the relative safety of bonds even as they buy stocks in hopes of a rate cut. Overseas demand could also be helping U.S. government debt.
One thing that could help the market sort out how much it should be excited about a possibly more dovish Fed or pessimistic about the economy could be the upcoming earnings season. Once that gets underway in earnest, consider listening to comments from company executives about where they think the economy is headed, and how that might relate to their businesses in the near future. Such statements could either confirm the weakening data picture or provide an encouraging counterbalance to it.
Trading volumes were light Wednesday and it’s possible that they may be light today as well given that some investors may be taking a day of vacation to bridge the gap between the holiday and the weekend. It may be worth keeping in mind that light volume can exacerbate stock market volatility.
Figure 1: Gold futures (/GC) and the NYSE Arca Gold BUGS Index (HUI) have been on a tear recently amid worries about global growth and trade tensions as well as expectations for a Fed rate cut.However, today's strong employment reports sent gold down in early trading.Data source: NYSE, CME Group. Chart source: Thethinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Gold Miners Shining: Although gold futures were under pressure after this morning’s jobs report, recently, they hit their highest point since 2013 and the NYSE Arca Gold BUGS Index (HUI) of miners jumped to its highest point in more than a year. Gold is often viewed as a safe haven, so it has been getting some support from ongoing trade tensions and worries about global economic growth. But the precious metal is also viewed as an inflation and dollar hedge. The dollar had been under pressure as expectations of a Fed rate cut grew—lower rates can work to increase inflation and undermine the greenback. A weaker buck makes dollar-denominated gold less expensive for those holding other currencies, which can boost demand. That said, like stocks, bonds and gold, the dollar reversed course this morning after the release of the jobs report, with the U.S. Dollar Index ($DXY) rising above 97 for the first time since June 20.
The recent rally in gold futures and gold miners may bring up questions about the different ways of investing in the yellow metal. On the one hand, owning gold futures gives investors relatively pure exposure to the price of gold. But gold futures, along with other commodities, are notoriously volatile and they don’t pay dividends. And futures involve leverage, which can exacerbate losses as well as gains. On the other hand, there are gold companies that do pay dividends, allowing investors to have exposure to the price of gold while at the same time having the potential to earn something extra. A downside there is that the exposure to gold isn’t as pure as with futures because gold miners carry risks such as a mine not being as profitable as expected or other company-specific risks that gold futures don’t have. And of course, dividends are never a guarantee.
Know Your Customer: Famed auto executive Lee Iacocca’s death brings memories of a man who had a real feel for consumer sentiment, something many companies today still struggle to understand. Back in 1964, Ford (F) launched Iacocca’s most famous product, the Mustang, after Iacocca decided that young-adult baby boomers would go for a sporty, practical, cheap coupe. The car blew through annual sales expectations of 100,000 in just three months, with more than a million sold in the first year-and-a-half of production. Iacocca took some heat a decade later for redesigning the Mustang as a smaller, more fuel-efficient and much less powerful car in 1974, but the Mustang II—now widely derided by auto enthusiasts—was also a model that met consumer needs at the time, coming on the market just as a global fuel crunch caused gas prices to double.
Iacocca is also known for his contentious relationship with Ford CEO Henry Ford II, who according to biographies resented the accolades Iacocca received and ultimately fired Iacocca in 1978, saying afterward, “Sometimes you just don’t like somebody,” according to Iacocca. That might have stung, but Iacocca bounced back to help Chrysler emerge from hard times in the early 1980s and introduce the minivan. Another case of knowing what the consumer wanted perhaps before consumers even knew it.
Check out all of our upcoming webcasts or watch one of the many archived ones, covering a wide range of topics from market commentary to portfolio planning basics to trading strategies for active investors. No matter your experience level, there’s something for everybody.
TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.
Economic calendar for week of July 1. Source: Briefing.com
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.