(Friday Market Open) The U.S. jobs machine continues to churn, creating 209,000 jobs in July and taking the unemployment rate down to 4.3%. The report provides more evidence of economic vigor, and could give record-high stocks another boost as the week closes out.
People tend to focus on the jobs number, but hourly wage growth of 0.3% was another healthy sign. Wages haven’t been growing at rates the Fed wants to see, but this time the rise in pay matched analysts’ expectations and sent a signal that inflation might finally be ticking up. The Fed is likely to be happy with this kind of report.
Looking at where the job growth came, it’s really good to see manufacturing and construction move up. That’s the really important takeaway. Also, health care and professional services were numbers two and three in growth, and they remain stalwart. Food services and drinking places were the biggest job growth category, which isn’t necessarily a bad thing this time out in such a strong report.
This marks two job reports in a row with 200,000 or more jobs created and the second-straight month in which the number easily beat analysts’ expectations. Wall Street’s consensus was for job creation of around 180,000. One fear was that the job market might flatten, but that doesn’t seem to be happening, with the three-month average now at a healthy 195,000. June job growth, which was already strong at 222,000, got revised upward to 231,000. Now we’ll find out if the data are enough to send the stock market to an eighth-straight closing high.
Stocks posted another record yesterday but just barely, with the Dow Jones Industrial Average ($DJI) limping to the finish line to gain just 0.04%. That was enough, though, to give it seven-consecutive record settlements. It’s probably more informative to follow the wider S&P 500 (SPX) and Nasdaq (COMP), both of which posted slight losses Thursday. The DJIA record streak however, does give people something to talk about.
More political drama slapped the stock market late Thursday after The Wall Street Journal reported that Special Counsel Robert Mueller has impaneled a grand jury in Washington, D.C., to investigate Russian interference in the 2016 U.S. presidential election.
One thing we saw back in May when politics touched Wall Street was a flight to so-called “safe” assets like bonds and gold. Both have been generally on the rise lately, but that probably reflects underlying economic trends. Also, some saw the sell-off in May as a buying opportunity, and markets advanced to new highs in the following months.
Meanwhile, the U.S. dollar stayed under pressure Thursday and has had a really rough week, sinking to 15-month lows. If the euro moves up above $1.20, that could convince investors that the Fed might relax on interest rates. Often a slowdown in the rate-hike cycle indicates a faltering economy, but with 2.6% growth in gross domestic product (GDP) last quarter and the kind of jobs and wages growth we saw in July, there’s not too much concern yet. The euro recently traded just below $1.19.
Ten-year bond yields tumbled to 2.22% by late Thursday, leaving month-ago highs near 2.4% as an even more distant memory. However, bonds fell after the jobs data, and yields climbed back to 2.26%. The falling dollar and stubbornly low yields sit in contrast with record high stock prices. What we’re seeing here as stocks move up is the impact of good earnings, and at the end of the day, earnings tend to drive the market.
Over in the energy pit, oil prices enjoyed a sparkling start to the week but now look like they’re going to finish with losses. Futures prices remained below $49 a barrel early Friday as investors assessed rising output in the U.S. and from OPEC countries. The market’s failure to hold levels above $50 reached at mid-week sends a bearish signal from a technical perspective. The $50 level is getting awfully difficult to achieve.
Fridays are often less exciting in the earnings world, but today brings Aon (AON), Toyota (TM), and W.P. Carey (WPC) before the opening bell, followed by Berkshire Hathaway (BRK.B) after the close. So no rest before the weekend, it seems.
Low Ceiling Ahead: It sounds far off now, but a potential market pitfall looms Sept. 29. That’s the day by which the Treasury Department says Congress needs to raise the debt ceiling to ensure the government can pay its bills. Failing to raise the debt ceiling could spark a global financial crisis and potentially hurt the stock market, according to a report in The Washington Post. The House and Senate are expected to be in session together for a total of just 12 days from now until the debt ceiling deadline. If legislators are forced to focus on the debt ceiling during those 12 days, it also means less time to work on tax reform, The Post noted.
Sector Scan: Pulling back a bit to look at recent sector performance, the last five sessions saw gains for some of the more defensive neighborhoods of the market, including health care and utilities. Financials also rose. Energy fell as crude oil prices stumbled, while materials, and consumer staples both took small steps backward. Info tech and industrials are about even, which is also true for the SPX, down just a touch over the period. Looking ahead, some of the key earnings reports that remain include major retailers, so keep an eye on consumer discretionary, a sector that’s rebounded to climb almost 1.5% over the last month but fell over the last few sessions.
Will Next Hike Be in 2018? Chances of a third 2017 Fed interest rate hike keep slipping, falling from 50% a week ago to just over 40% by late this week, CME futures indicate. Earlier this week, Cleveland Fed President Loretta Mester said the Fed should continue its “gradual” approach to rate hikes and also repeated what the Fed has said on many occasions: That inflation will head back toward the Fed’s goal of 2%. However, PCE price data earlier this week showed inflation actually decelerating to 1.4% over the last year from the previous 1.5%. Continued weakness in both the dollar and bond yields could serve as further evidence of investors stepping back from the theory of three rate hikes this year.
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