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Economy Turns Job-Generator and Wall Street’s Turned Off?

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June 5, 2015

Investors’ collective knee-jerk reaction to the robust May jobs report issued Friday morning was noticeably negative. It marked another trip into an alternative universe where “good” news is snubbed because it could greenlight an aggressive interest-rate response from the Federal Reserve. The real story— once everyone has some time to think a little—is pro-economy and that’s ultimately good for stock bulls.

With the reaction to the strong gain in payrolls across key job sectors, plus upward revisions to past months’ data, downside pressure could persist for the S&P 500 (SPX). It poked below the closely watched 2100 line with Thursday’s close (figure 1). That now puts support in place at 2072. Something to keep an eye on.

S&P_500-breaks-support

FIGURE 1: SPX BREAKS 2100.

The S&P 500 (SPX) closed on Thursday below the closely watched 2100 line. Chartists say support now comes in at 2072. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

The Details. The U.S. economy created 280,000 new jobs in May, the most since late in 2014 and more than most Street economists had banked on after a pause in hiring earlier in the year. The unemployment rate edged up to 5.5% from 5.4%, but mainly because more people entered the labor force in search of work. The government also said 221,000 new jobs were created in April instead of 223,000. March's gain was raised to 119,000 from 85,000. Growth was solid across several categories in May, importantly in the professional services and health care areas, while seasonal hiring likely pushed up hospitality jobs.

And Wages? It looks like employers finally had to pay up for talent. That’s a good thing too, generally. It does spark the inflation debate again, however. Average pay rose 8 cents to $24.96 an hour, pushing the increase over the past 12 months up to 2.3%--the highest rate since mid-2013.

Bonds Get Smacked. The benchmark 10-year Treasury note yield, a proxy for mortgage lending and other closely watched lending rates, topped 2.42% in the immediate wake of the strong jobs reading as bond prices fell. As far as stock investors are concerned, bond participants look to be positioning for higher rates. Higher yields may boost financial shares but makes broader Wall Street a little nervous that if rates get too high too fast, the recovery risks a stall.

Good trading,
JJ
@TDAJJKinahan

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