(Friday Market Open) U.S. job growth got back on track in June, with a solid tally washing away the bad taste left by a weak May report.
June payrolls jumped 222,000, the government said, easily surpassing Wall Street analysts’ consensus expectations for just around 170,000. Growth was strong through a number of key sectors, including health care, financial activities, mining, business and professional services and construction. Government jobs also contributed to the gains. To make matters even more positive, the Bureau of Labor Statistics revised upward the last two months of job gains by a total of 47,000, bringing the three-month average to a very respectable 194,000.
Somewhat surprising as far as sector growth was health care not being in the top three, and the fact that retail jobs growth wasn’t as bad as some thought it might be despite online competition.
Jobs growth is now averaging a healthy 180,000 so far this year. That might not be at the heights of 2015 and 2016, but some economists say even a much lower level of job growth would be enough to keep the unemployment rate at current levels.
Stock indices edged a little higher in pre-market trading after the report, but the gains were limited, perhaps because the wage component of the data failed to impress, rising just 0.2%. Analysts had predicted 0.3%. It’s possible that health care’s slightly less-than-expected contribution to the job gains might have prevented some of the wage pressure from developing, since those tend to be higher-paying positions. Overall, however, there’s still little sign of job growth leading to gains in pay, meaning inflation might remain muted. Next week’s reports on June consumer and producer prices could provide more insight.
In the wake of the payrolls data, there wasn’t much immediate change in market expectations for further Fed rate hikes, which still stand above 50% by December, according to CME futures. And bond yields didn’t move much either, staying near 2.38% for 10-year Treasuries. Perhaps these indicators might have moved up more if wage growth had been better. The Fed has been looking for 2% inflation, but this report doesn’t seem to point toward that.
Turning away from the jobs picture, what appeared to be a promising early rally in crude oil fizzled later Thursday despite bullish weekly U.S. stockpiles data that showed big drawdowns for both oil and gasoline. The focus instead seems to be on U.S. crude production rising about 700,000 barrels a week from this time a year ago and crude supplies remaining slightly higher year over year. Oil slid further by Friday morning, with U.S. crude falling back to below $45 a barrel. Old support at $44 a barrel could be the level to watch.
On the geopolitical front, investors might want to focus on President Trump’s meeting with President Putin of Russia today, as the two are expected to discuss a number of issues, including U.S. economic sanctions.
One puzzling development Thursday was that bond prices fell even with a heightened awareness of geopolitical tension surrounding the North Korea situation. Investors often buy U.S. bonds amid times of trouble, as part of a flight to safety. Gold, another traditional defensive investment, rose slightly Thursday. One thought is that recent weak demand for European bonds might have spilled over into the U.S. bond market. Whatever the case, rising borrowing costs in what appears to remain a slow-growing economy might be one reason the stock market skidded Thursday. All 11 sectors fell as the S&P 500 Index (SPX) had its worst day since May.
VIX Roars Back: Volatility has shied from the spotlight most of the year, but Thursday brought it back into the picture thanks in part to tensions between the U.S. and North Korea. There also might have been some additional anxiety in the market heading into today’s monthly payrolls report. The VIX climbed back well above 12 after falling toward 10 earlier this week. Keep things in perspective, however, as current VIX readings remain historically low. The recent high in VIX was a 15 reading last month, but the indicator quickly fell back, as it has done for the most part this year whenever it rose.
Look Out, Info Tech: Pretty much all year, info tech has been the leading market sector, and it still is. Even with Thursday’s weak performance, info tech stocks remain up more than 16% year to date. But unless the info tech sector is wearing blinkers, it might be sensing health care galloping up on its side, and the two are now practically nose-to-nose. Health care stocks are up nearly 16% this year, helped in part by double-digit gains in the Nasdaq Biotechnology Index. The thing to watch remains health care legislation on Capitol Hill. The Senate bill introduced last month looked positive for health care companies, analysts said at the time. But delays in the bill’s passage and possible changes to the legislation mean the long-term impact remains uncertain.
Bond Yields, Dollar Go Their Own Ways: The U.S. Dollar Index remains near its lows for the year, recently trading at 95.86, down from above 100 back in January. A weaker dollar sometimes indicates lack of investor faith in the U.S. economy, though it can help multinational U.S. companies by making their products cheaper overseas. At the same time, bond yields keep rising, and that’s often a sign of faith in a stronger U.S. economy. The benchmark 10-year yield hopped up toward 2.37% on Thursday and climbed even higher by Friday morning. The rise in yields might reflect the Fed’s continued emphasis on additional rate hikes, made more clear by Wednesday’s June meeting minutes. Looking at other so-called “risk” assets, gold remains near the low end of its recent range, and volatility, while slightly up, is also historically low. One question is whether the dollar might draw renewed buying interest if tensions continue to simmer on the Korean peninsula.
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