Prior to this morning, this week’s labor data arrived cooler than anticipated. But the main event—today’s Jobs Friday—delivered just the opposite. Markets are responding by sending yields to the nosebleeds, but stocks remain near the flatline, despite the masters of fixed-income odds downwardly adjusting prospects of a September Fed cut to a coin-flip. Still, this report provides evidence for hawks and doves alike with blockbuster jobs growth and robust wage pressures coinciding with an uptick in unemployment.
May Hiring Soars Past Expectations
The US economy added a whopping 272,000 workers last month, trouncing expectations of just 185,000 and accelerating from April’s 165,000. Headline rosters weren’t the only surprise, with employee paychecks picking up steam, rising 0.4% month over month (m/m), well above the 0.3% expected and the prior month’s 0.2%. Average hourly earnings rose 4.1% year over year (y/y), above the 3.9% projected and the 4% from April. While hiring and compensation increases were positive for households, the uptick in the unemployment rate from 3.9% to 4% did offer cause for concern, considering that every 50-basis point (bp) rise from a trough historically has resulted in recession. For context, this cycle’s trough was 3.4%, 60 bps south from the current level. Also troubling—the number of temporary workers declined to a fresh cycle low, pointing to softening labor conditions.
Broad Hiring Across Sectors
Headcount additions were broad with every sector ex-mining adding employees. The gains continued to be driven by non-cyclical industries, however, with education/health services and government adding roughly half of the total. Still, the leisure and hospitality, professional/business services, trade/transportation/utilities and construction sectors boosted payrolls by 42,000, 33,000 26,000 and 21,000. The manufacturing, finance, other services and information segments added 10,000 jobs or less.
Discouraged Workers Hamper Performance
While hiring increased, the labor supply contracted, a result of more individuals becoming discouraged about their employment prospects. The labor force participation rate declined 20 bps to 62.5% m/m reflecting 250,000 folks that left the labor force. That is, a quarter of a million people are no longer working and not looking for jobs either. This is an unfavorable development from an inflationary perspective as it drives compensation costs higher for employers.
GameStop Revenue Weakens, Travel Softens and AI Comes to Document Technology
Meme stock GameStop continues to fight the headwinds of consumers shying away from brick-and-mortar stores while in a separate development, peak travel demand for ski resorts triggered by the Covid-19 pandemic is waning. In the business world, companies are continuing to embrace digital contracts as illustrated by DocuSign, which recently added artificial intelligence to its services. Those are a few points from the following earnings release highlights:
Bond Yields Soar as Equities Meander
Markets are paring gains on the back of this report, with investors frustrated that they may have to replace their kicks on the back of an incrementally prolonged walk towards the Fed’s first reduction this cycle. Yields and the greenback are soaring toward the heavens while stocks trade in a bifurcated way, as equity bulls fight hard to hold on. Indeed, the S&P 500 even made another fresh all-time high today but is now lower on the session. The Russell 2000, S&P 500 and Nasdaq Composite benchmarks are losing 0.8%, 0.1% and 0.1% while the Dow Jones Industrial gains 0.1%. Sector breadth is split with 6 out of 11 sectors lower. Leading the charge to the downside are materials, real estate and utilities, which are losing 0.8%, 0.8% and 0.5%. Piloting the day’s winners are financials, healthcare and industrials; they’re up 0.5%, 0.4% and 0.3%. In fixed-income and currency land, the 2- and 10-year Treasury maturities are changing hands at 4.86% and 4.42%, 13 bps loftier on the session, while the Dollar Index trades at 104.88; it’s up 77 bps. The US currency is gaining relative to all major counterparts, including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian dollars with investors realizing that the Fed may be late to the global rate-cut party. Commodities are getting obliterated for the same reasons, with silver, copper, gold, lumber and crude oil all pointing south by 6.2%, 4.1%, 3.9%, 2.8%, 0.6% and 0.3%.
Fed Meeting Top of Mind
At this juncture, this morning’s report is serving to extend our journey across the monetary policy bridge ahead of some significant data releases and economic developments next week. Investors are certainly awaiting next week’s interest rate decision from the Fed which will arrive a few hours after May’s CPI. June’s Fed meeting is unique since it will also feature an update to the dots (Summary of Economic Projections) pointing to the number of rate reductions the committee envisions for the remainder of this year. Just because Ottawa and Frankfurt brought out the scissors, it doesn’t mean Washington will. More By This Author:Hindsight 2020
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