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Summary

The major domestic equity indexes gained on Friday, with the S&P 500 ending at a record high close, as energy stocks bounced back along with oil prices, while job growth rebounded. Nonfarm payrolls rose by 211,000 jobs last month after a paltry gain of 79,000 in March, and the unemployment rate dropped to 4.4 percent, near a 10-year low.

Energy was the best performing sector, rising 1.6 percent, after falling sharply a day earlier. Crude oil prices rebounded following assurances by Saudi Arabia that Russia is ready to join OPEC in extending supply cuts.

After seven sessions of not moving more than 0.2 percent in either direction, the S&P 500 eclipsed that range on Friday as stocks strengthened late in the day. The S&P 500 has gained 12.1 percent since the election, fueled by plans for tax cuts, infrastructure spending and deregulation. But the rally had slowed as the Street began to question Trump’s ability to enact his agenda.

The Federal Reserve left interest rates unchanged at its policy meeting this week. The central bank downplayed weak first-quarter economic growth while emphasizing the strong labor market, in a sign it was still on track for two more rate rises this year. Investors are pricing in a 75 percent chance of a hike in June, according to Thomson Reuters data.

In corporate news, IBM shares fell 2.5 percent after Warren Buffett said he sold about one-third of Berkshire Hathaway’s stake in the company.

Earnings season has come in above expectations with first-quarter earnings at S&P 500 companies estimated to have increased 14.7 percent, the strongest since 2011, according to Thomson Reuters I/B/E/S.

Shares of Cigna and IT services provider Cognizant rose after their respective reports.

Approximately 6.5 billion shares changed hands on the major domestic equity exchanges, a number that was just below the 6.6 billion share daily average over the last 20 sessions.

Job Growth Rebounds

Job growth rebounded sharply in April and the unemployment rate dropped to 4.4 percent, near a 10-year low, pointing to a tightening labor market that likely seals the case for an interest rate increase next month despite moderate wage growth.

According to a Labor Department report released Friday morning, nonfarm payrolls rose by 211,000 jobs last month after a paltry gain of 79,000 jobs in March. April’s job growth, which was broad-based, surpassed this year’s monthly average of 185,000.

There were hefty increases in leisure and hospitality, healthcare and social assistance as well as business and professional services payrolls.

The drop of one-tenth of a percentage point in the jobless rate took it to its lowest level since May 2007 and well below the most recent Federal Reserve median forecast for full employment.

The hiring rebound supports the Fed’s contention that the prosaic 0.7 percent annualized economic growth pace in the first quarter was likely “transitory,” and its optimism that economic activity would expand at a “moderate” pace.

As a result, the financial markets are now pricing in an 83 percent probability of a 25-basis-point rate increase at the Fed’s June 13-14 policy meeting, according to CME Group’s FedWatch program.

The U.S. economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

In April, average hourly earnings rose 7 cents, or 0.3 percent. However, downward revisions to previous months lowered the year-on-year increase to 2.5 percent, the smallest gain since August 2016, from 2.6 percent in March.

However, there are signs wage growth is accelerating as labor market slack diminishes. A government report last week showed private-sector wages recorded their biggest gain in 10 years in the first quarter.

With the labor market expected to hit a level consistent with full employment this year, payroll gains could slow amid growing anecdotal evidence that firms are struggling to find qualified workers. That could also boost wages.

A broad measure of unemployment, the U6 number, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, dropped three-tenths of a percentage point to 8.6 percent, the lowest level since November 2007.

The employment-to-population ratio rose one-tenth of percentage point to an eight-year high of 60.2 percent. This measure has risen for four straight months.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell to 62.9 percent from an 11-month high of 63 percent in March. It has rebounded from a multi-decade low of 62.4 percent in September 2015, and economists see limited room for further improvement as the pool of discouraged workers shrinks.

Construction payrolls rose by 5,000 last month and manufacturing payrolls increased by 6,000. Leisure and hospitality payrolls jumped by 55,000 in April. Professional and business services payrolls rose by 39,000. Healthcare and social assistance employment increased by 36,800.

Retail payrolls gained 6,300 after two straight months of declines. Retailers including J.C. Penney, Macy’s and Abercrombie & Fitch have announced thousands of layoffs as they shift toward online sales and scale back on brick-and-mortar operations.

Government payrolls jumped by 17,000 last month as an increase in hiring by local governments offset a decline in federal government employment.

A New Approach to Inflation

In a speech, San Francisco Fed President John Williams, one of the Federal Reserve’s experts on navigating a world of low inflation and economic growth the Frd should seriously consider ditching its old policy framework for a new approach to hitting its price-level goal.

Williams praised the advantages of a so-called price-level targeting regime over the Fed’s current regime of a simple 2-percent target. The central bank’s preferred inflation measure has been below this goal for some five years, though prices have recently edged higher.

“I believe that a price-level framework merits very serious consideration for central banks including the Fed,” Williams, who does not vote on policy this year under a rotation, said in a speech to the hawkish-leaning Shadow Open Market Committee.

As it stands, the central bank sets rates to keep unemployment low and to also hit 2-percent inflation as much as possible, irrespective of how long prices have lingered below or above target. On the other hand, price-level targeting would oblige the Fed to make up for years of excessively low inflation by pushing it above target for a similar period, and vice-versa.

“Baked into its very design is a ‘lower for longer’ policy prescription in response to sustained low inflation,” added Williams, who has floated a handful of new policy approaches over the last year including simply raising the inflation target.

Some economists and former Fed officials have also floated price-level targeting, though most central bankers say such a reform would provide little benefit and confuse investors and the public.

Williams, a former top advisor to Fed Chair Janet Yellen, has previously said he expects three or four rate hikes in 2017. The Fed has raised rates once this year.

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