Getting Warmer: Solid May Jobs Growth Below Expectations, but Could Ease Fed Taper Fears

Jobs report for May may have come in lower than the average estimate but equity index futures appear to be in slightly positive territory ahead of the open. Holding pattern could continue in the stock markets as the trading week ends.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/bears out: selloff picks up steam
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Key Takeaways

  • May jobs growth of 559,000 relatively solid but below expectations, diminishing rate worries

  • Solid earnings continued late Thursday with DocuSign, Broadcom 

  • Key inflation data on the way next week as consumer prices for May awaited

(Friday Market Open) May’s jobs report could be seen as a “Goldilocks” kind of data point, even if it wasn’t as strong as many had hoped with 559,000 jobs created. 

That was solid, but not spectacular. In sum, it doesn’t look like there’s anything in the report that’s going to change the Fed’s mind about continued need for monetary stimulus. Worries of a more “hawkish” Fed might diminish a bit here, perhaps loosening concerns on Wall Street about possible early tightening. 

Going into the report, some market participants had worried that a really big number or a major positive revision to April might get the Fed worried about possible economic overheating and inflation. There’s no way to read the Fed’s mind, obviously, but at first glance those worries seem to be unnecessary and an early “tapering” of monetary stimulus appears a bit less likely. 

May job creation of 559,000 announced by the Labor Department today fell way short of the 700,000 average analyst estimate. Additionally, the government added only 12,000 jobs to April’s relatively light 266,000 job growth figure. Some had thought that low number reflected possible timing issues in the government’s data gathering, but apparently not. It’s still possible the number could be revised in next month’s report, however.

Overall, today’s headline number is far from a disaster. In fact, 559,000 would have been considered an amazing figure before Covid. Any kind of job growth is good for workers and the economy. But with so many millions still unemployed, some market watchers had looked for bigger gains. 

Major indices had been mixed heading into the data, but rose in pre-market trading soon after the numbers came out. It looks like the Street, at least, is reading this report as a sign that more hawkish Fed policy might be further out than some had thought. 

Digging deeper, the actual unemployment rate fell to 5.8% from the previous 6.1% and is a new Covid-era low. In one positive sign, there was a big drop in the number of people who said they wanted to work but couldn’t because their employer closed or lost business due to the pandemic. The number of long-term unemployed also fell, and so did the number of people unemployed five weeks or less. This could back up some of those weekly initial jobless claims numbers we’re seeing, which seem to indicate less layoffs happening these days. 

Leisure and hospitality jobs grew nearly 300,000 in May, dominating all categories as places like restaurants and hotels keep reopening. This is great for those employees who were hurt by the pandemic, and also points toward possible strength in the economy from a spending standpoint. People going out to eat are spending money, and the people working at restaurants and hotels are employed again and hopefully able to buy more of what they need. This could give the economy a boost in weeks to come.

The problem is, employment in a lot of higher-paying jobs like manufacturing, construction, and professional and business services didn’t grow much in May. This might have contributed to average hourly earnings rising less last month than they had in April. More of the jobs are being created in lower-paying industries, and that’s possibly reflected in the wage number. 

Chances of a Fed rate hike at some point this year is 7%, according to CME Fed funds futures. That’s down from 8% a week ago and 14% a month ago. Today’s report didn’t seem to have much impact on those already low odds, at least in the early going. 

The bond market also saw little change in the minutes after the report. The 10-year yield was steady just above 1.62%. That’s pretty near the middle of its recent range. Some analysts had worried that a really blowout jobs number might cause that number to test 1.7%, the high end of the range, which might have presented problems for “growth” sectors like Tech. Nothing like that so far.

Unemployment Line Lingers

Today is arguably all about the jobs report, but let’s not forget yesterday’s jobs data. The weekly initial jobless claims number fell to 385,000, bringing the four-week average down to 428,000, the lowest since mid-March 2020 when it stood at 225,000. That’s good news for the economy, but don’t overlook other numbers deeper in the data that aren’t so cheery.

Mainly, the four-week moving average for continuing claims increased by 22,750 to 3.69 million. That isn’t so hot, because it might signal that once unemployed, people are taking longer to get back to work. The debate in Washington, D.C., is about whether the government’s elevated benefits might discourage people from taking jobs that are available.

Besides the initial unemployment claims data, there wasn’t much to write home about yesterday. Trading appeared pretty thin ahead of the jobs report, and stocks generally pulled back some of the gains from earlier this week. 

The major indices have been trading in a really range-bound way the last few weeks with narrow daily moves, something that may be a sign of consolidation ahead of the next trend, one analyst said. Data, the Fed, and outside events like the infrastructure bill could all help us get a better sense of whether that future trend is down or up. 

Next Week? Here Before You Know It

After all the data and earnings fireworks in this shortened week, maybe it’s too soon to be thinking about what’s ahead. Still, here’s some stuff to monitor once we get past the weekend. 

In Washington, infrastructure talks continued between President Biden and Senate Republicans this week as the two parties try to find some sort of compromise. The jobs report might play into progress, as it could be seen as a sign of whether the previous economic stimulus worked. The administration said it doesn’t see Monday as a deadline, despite some earlier media reports of that.

Stocks appeared to get a bit of traction from news Thursday that the administration is open to implementing a minimum rate of 15% instead of raising the top corporate rate to 28% from 21%, research firm Briefing.com noted. 

If it looks like something is going to happen on infrastructure over the next few days, it could contribute underlying support for sectors that stand to possibly benefit from the spending, including Materials, Energy, and Industrials. You might want to temper your expectations a bit, though, considering all three of those are among the market leaders over the last month.

The consumer price index (CPI) for May, due next Thursday, is likely to be front and center now that the jobs report is out of the way. Back in April, CPI jumped 0.8% from the month before, and core CPI (which strips out energy and food prices) rose 0.9%, the highest month-over-month rise since April 1982. 

We’ll discuss CPI more next week and give a sense of what sort of May numbers analysts expect and how the market might react, so stay tuned. Also stay tuned next week for University of Michigan consumer sentiment, the trade balance, and a handful of earnings reports, including those expected from GameStop (GME) and Chewy (CHWY).

philadelphia semiconductor index

 CHART OF THE DAY: THAT NEW CAR SHINE. Electric car demand hopes are driving shares of Ford (F—candlestick) and General Motors (GM—purple line) to multi-year highs. The companies’ shares each rose more than 6% yesterday alone. Data Source: NYSE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Dollar Rebounds Ahead of Jobs Data: After carving lows just below 90 and approaching levels last seen in early January, the U.S. Dollar Index ($DXY) put on a nice rebound late this week to climb back out of the sub-90 range. From a technical standpoint, it looks like $DXY spent a few days testing lows but couldn’t find enough selling interest to pick up steam to the downside. That may have caused some short-covering Thursday ahead of the jobs report, especially among traders worried that a strong jobs number could trigger a more hawkish tone from the Fed (with the understanding that a stronger rate outlook would typically support a stronger dollar). 

Watching where Treasury yields go after today’s report is one way to track the data impact, but also keep an eye on the dollar for a sense of where currency traders think the economy and rates might be going. For example, a move above the one-month old intraday high of 91.43 might stir up more bullish interest in the greenback. And remember: The dollar tends to be inversely correlated to commodity prices. 

Deeper Dive into Airline Traffic: The latest Transportation Safety Administration (TSA) numbers show air passenger traffic really starting to pick up as more people appear to feel safer moving around and about. Traffic remains several hundred thousand a day below 2019 levels, but much closer to normal than it was a few months ago and roughly five times the year-ago levels. 

However, relying on the TSA data for an airline health check isn’t necessarily the best way to keep your investing strategy “number one on the runway,” so to speak. Those numbers don’t tell us which passengers are traveling for business or leisure, how much they paid, and where they’re going (international vs. domestic). Airlines traditionally make more of their profits from business travel, but that appears to remain tempered, while people increasingly are taking cheaper leisure-related flights as they get back to vacationing now that Covid seems like less of a threat. 

EVs and the Substitution Effect: About 45 years ago when General Motors (GM) and Ford (F) together sold around 70% of the cars bought in the U.S. (most of them now fondly considered “land yachts” like the nearly 19-foot long Cadillac Eldorado coupe), it wouldn’t have been surprising to see GM and F shares charge higher the way they are now. These days they hold about 30% of the North American light vehicle market, according to digital financial media company CSIMarket, and their stocks and businesses have languished for years. Despite that, both stocks made big gains again Thursday amid excitement over electric vehicles, and have been getting lots of love from investors most of this year. F shares hit six-year highs. 

The thing to consider if you’re an investor considering hopping aboard this rally in U.S. automakers is this: There’s a saturation point when it comes to demand for vehicles, even electric ones. At some unknown date, any electric vehicle sold by one manufacturer, whether it’s F, GM, Tesla (TSLA) or someone else, is going to take away a sale from its competitor, not just add on to total sales. TSLA may already be feeling the heat from its more traditional competitors, as its shares have been in a free fall this year. Even after 10 years of growing electric car penetration, it remains a bit of a niche market, and people are keeping their old cars longer than ever (nearly seven years, according to data provider IHS Markit). This isn’t to say there’s nothing to like about the GM and F rallies, only to put them in perspective.

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • May jobs growth of 559,000 relatively solid but below expectations, diminishing rate worries

  • Solid earnings continued late Thursday with DocuSign, Broadcom 

  • Key inflation data on the way next week as consumer prices for May awaited

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