The Market Today

TODAY’S CALENDAR

Strong Rebound in Manufacturing and Local Government Payroll Growth: Total nonfarm payroll growth for the month of June rose 224k, a strong rebound from a worrisome May report.  May’s figures were notched slightly lower from +75k to +72k, but the stronger June report brings the three-month average back to a still-positive 171k.  Part of the June strength was a 33k increase in government workers, although this does not appear to be the temporary increase in census workers at the federal level, instead coming from the local side of government which added 29k new jobs.  Federal payrolls only increased 2k with state government adding another 2k.  Excluding government payrolls, the private sector added 41k more jobs than expected, up 191k.  The 3-month average for private payroll growth has slowed to 156k, versus the 6-month average of 161k and the 12-month average of 183k.  Clearly, there is a slowing in the rate of jobs gains but it does not appear to be an acute drop from a breakdown in trade talks.  The latter was the greatest fear for economists, but the labor data points to a different narrative.

By sector, there was notable strength in the goods-producing sectors with construction jobs up 21k and manufacturing up 17k. On the weaker side were leisure jobs which increased just 8k (12-month average of +31k) and the retail sector which lost another 6k jobs.

Unemployment Rate Barely Ticks up to 3.7% on Increase in Participation: In the household report, the unemployment rate rose from 3.62% to 3.67% (enough to round the headline rate up to 3.7%) on a rebound in the number of people in the labor force.  Those reporting as working or looking for work (considered to be “in the labor force”) rose 335k which included a 247k increase in the number of employed persons.  The participation rate rose from 62.8% to 62.9%.  This is the second consecutive monthly increase in participation after the year began with four consecutive months of decline.

Earnings Growth Remain Modest: Despite the strong June jobs data, earnings growth continued to be tame.  Average hourly earnings rose just 0.2% month-over-month, although May’s figure was revised up from +0.2% to +0.3%.  However, the year-over-year rate of earnings growth edged down from +3.15% to +3.14%, the weakest rate of annualized gains in ten months.  Moreover, the average weekly hours worked remained on the soft side at 34.4.  With little evidence of increasing wage pressure, despite the otherwise strong labor data, the Fed is unlikely to see the strong job market as being inflationary.

Monetary Policy Impact: Because payroll growth rebounded in June, the Fed is less likely to feel an imminent need to cut rates.  However, the strong labor market still does not look inflationary based on the modest wage gains and is unlikely to dissuade the Fed from cutting rates at their July 31 meeting if their overall economic concerns remain high.  Moreover, Wednesday’s ISM index may be more compelling to Fed officials given the lagging nature of the labor market.

TRADING ACTIVITY

Wednesday – Everything Rallied Again as Investors Hoped Weak Data Will Force the Fed to Ease: The major U.S. equity indices closed at records Wednesday after a couple of key economic reports were softer than expected, strengthening the market’s expectation the Fed will soon opt to ease policy to offset increasing economic uncertainty. It started with ADP’s worse-than-expected private payroll growth estimate of 102k for June which dropped the two-month average gain to 72k, the weakest since 2010. Less than two hours later, the ISM’s non-manufacturing index for June slipped more than expected, creating concerns that trade worries are starting to weigh on more than just manufacturing output. Treasury yields, which were already lower in lockstep with a decline in European yields, closed at or near new multi-year lows. The 2-year yield closed down 0.2 bps at 1.76% while the five year fell 1.0 bp to 1.73%, the second-lowest level since 2017. The 10-year yield ticked down 2.4 bps to 1.95%, marking a new low close since November 2016, and the 30-year bond yield slipped 3.5 bps to 2.47%, the lowest since October 2016. For the first time this cycle, the 30-year yield closed within the Fed’s target range, currently at 2.25% to 2.50%. Despite the continued uncertainty, equities latched onto hopes the weakness evident in Wednesday’s data increased the likelihood the Fed will soon lower rates. All 11 sectors within the S&P 500 gained to push the overall index up 0.8% and to its third consecutive record close. For the first time since October, the Dow also closed at a new all-time high while the Nasdaq’s record finish was its most recent since May.

Overnight – Treasury Yields Rose in Anticipation of U.S. Jobs Report: Global markets checked up Friday as investors awaited this week’s headline U.S. jobs report. Stocks were mixed across Asia but European equities and U.S. futures all edged lower ahead of the payroll data. Core global bond yields had ticked higher and the Treasury curve flattened out gradually, shrinking the spread between the 2- and 10-year Treasury notes to 17.9 bps, the narrowest since May. Friday’s payroll report is seen as a key component of the market’s debate as to how steeply the Fed will cut rates over the next 12 month amid signs trade tensions are slowing the global economy. Those growth worries were reignited overnight by data showing factory orders in Germany slumped 2.2% in May, much worse than the 0.2% expected decline, and were down 8.6% from a year ago, the most in nearly a decade. Germany’s 10-year yield was trading at 0.39% after falling as low as -0.41% on Thursday and below the ECB’s -0.40% deposit rate for the first time. Around 7:15 a.m. CT, the 2-year Treasury was 3.1 bps higher at 1.79% and the 10-year yield had added 2.0 bps to 1.97%. After falling within the Fed’s target range for the first time this cycle on Wednesday, the 30-year yield was trading at 2.48%. After hiring easily cleared expectations, the 2-year yield moved to up 7.5 bps on the day to 1.84% while the 10-year yield increased its daily gain to 5.1 bps, pushing the benchmark yield back to 2.00%.

NOTEWORTHY NEWS

ISM’s Services Survey Showed Effects of Economic Uncertainty Leaking Outside of Manufacturing: The ISM’s non-manufacturing index covering the U.S. services sector slipped more than expected in June, a sign that the growing economic uncertainties have worked their way into the non-manufacturing industries of the U.S. economy. The headline index dropped 1.8 points last month to 55.1, matching its lowest reading since October 2016. The slowdown was driven by nearly-equal declines across the key indices tracking production, employment, and new orders which more than offset slower supplier delivery times. The new orders index dropped to its second-lowest level in almost three years. Separately, Markit revised up its services PMI to show a small improvement of activity in June. However, both reports clearly show that the pace of growth within the U.S. services sector has slowed notably from the strong pace in 2018.