June Jobs Take Off: Stocks Surge

The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?

Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.

My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.

Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.

According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.

MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.

• DJIA: 18,146, up 1.1% on week, up 4.1% YTD, now above pre-Brexit level (18,011)
• S&P 500: 2130, up 1.3% on week, up 4.2% YTD, 1 point below 05-15 record high
• NASDAQ: 4956, up 2% on week, down 1% YTD
• Russell 2000: 1177, up 2.2% on week, up 3.6% YTD
• 10-Year Treasury yield: 1.366%, a record low close (from 1.45% a week ago)
• British Pound/USD: $1.295, a 31-year low
• August Crude: $45.41, down 7.3% on week, largest percentage loss since Feb
• August Gold:  at $1,358.40, up 1.5% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.28 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 7/11:

Alcoa

10:00 Labor Market Conditions

Tues 7/12:

6:00 NFIB Small Biz Optimism Index

10:00 Job Openings and Labor Market Turnover

Weds 7/13:

8:30 Import/Export Prices

2:00 Fed Beige Book

2:00 Treasury Budget

Thursday 7/14:

BlackRock, JPMorgan Chase, Yum! Brands

The Bank of England interest rate decision (the first post-Brexit announcement)

8:30 PPI-FD

Friday 7/15:

Citigroup, U.S. Bancorp, Wells Fargo

8:30 CPI

8:30 Retail Sales

9:15 Industrial Production

10:00 Business Inventories

10:00 Consumer Sentiment

Week ahead: Strong jobs report before Yellen Hearing

The government shutdown was no biggie, at least according to the October jobs report. The economy added 204,000 jobs during the month and the two previous months were revised higher by a total of 60,000. In the blink of an eye, the three-month average increased from a paltry 143,000 to a respectable 202,000. The Labor Department noted that "there were no discernible impacts" of the government shutdown in the survey that measures payroll numbers, wages and hours worked. However, the shutdown impacted the household survey, which showed a 448,000 increase in the number of temporary layoffs, a category under which furloughed government employees fall. (To put that number into perspective, the rise in temporary layoffs in September was just 25,000.) As a result, the civilian labor force tumbled by 720,000 and the labor force participation rate fell by 0.4 percent to 62.8 percent, a rate last seen 36 years ago in 1977.

While the government shutdown negatively impacted the unemployment rate and the participation rate, there is reason to believe that the trend will be reversed in the November report. And there was another positive indicator, buried in the report: the nation’s retailers hired 159,500 seasonal workers in October, the highest number since 1999. (These figures are not seasonally adjusted.)

The better than expected jobs report immediately increased speculation that the Fed will begin to taper its $85 billion monthly bond purchases at the December 17-18 FOMC meeting. Lawmakers will be able to ask the Fed Chairman nominee more about central bank strategy, when Janet Yellen's Senate confirmation hearing begins this week. While it is anticipated that the Committee will approve her nomination, market watchers will be listening for any clues about future policy action (or inaction). She will like quote from the Bernanke playbook: the Fed will begin pulling back from purchasing bonds when the economic outlook improves.

MARKETS: It was another record-breaking week for large stock indexes.

• DJIA: 15,761, up 0.9% on week, up 20.3% on year
• S&P 500: 1770, up 0.5% on week, up 24.1% on year (5^th consecutive weekly gain)
• NASDAQ: 3919, down 0.1% on week, up 29.8% on year
• 10-Year Treasury yield: 2.75% (from 2.62% a week ago)
• Dec Crude Oil: $94.60, down $0.01 on week
• Dec Gold: $1289.20 down 1.8% on week
• AAA Nat'l average price for gallon of regular Gas: $3.20

THE WEEK AHEAD:

Mon 11/11: Veteran’s Day: Banks and bond markets closed, stock markets open

Tues 11/12:

7:30 NFIB Small Business Optimism Index

8:30 Chicago Fed National Activity Index

Weds 11/13:

2:00 Monthly Budget Statement

Thurs 11/14:

8:30 Jobless claims

8:30 International Trade

8:30 Non-Farm Productivity and Labor Costs

10:00 Fed Nominee Yellen's Confirmation Hearing

11:00 Report on Household Debt and Credit (Q3)

Fri 11/15:

8:30 Import Prices

8:30 Empire State Manufacturing Index

9:15 Industrial Production

9:15 Capacity Utilization

10:00 Monthly Wholesale Trade