The major domestic equity indexes were lower on Friday, as the S&P 500 snapped a three-day streak of record closes, following an unexpectedly strong jobs report that led investors to reassess how dovish a stance the Federal Reserve may take at its next meeting.
The Labor Department indicated that nonfarm payrolls rose by 224,000 jobs in June, the most in five months, exceeding expectations of 160,000 new jobs.
As a result, the Street scaled back its expectation of a rate cut of half a percentage point, although confidence remained high the Fed would cut rates by 25 basis points.
The jobs report also pointed to slowing wage growth and mounting evidence that the economy was losing momentum, which could still give the Fed enough of a cushion to cut rates at the end of the month.
The Fed, in its semiannual report to Congress, repeated its pledge to “act as appropriate” to sustain the economic expansion, and said while U.S. economic growth continued “at a solid pace” in the first half of the year, it likely weakened in recent months as higher tariffs weighed.
The bank index, which has been under pressure from falling benchmark debt yields in recent weeks, rose 0.73% and helped drive a 0.38% gain in the financials index, one of the few bright spots among S&P sectors.
The defensive names such as real estate, utilities and consumer staples each lost ground as a rise in Treasury yields served to make the dividend-paying companies less attractive.
Trading volumes were light at the end of a holiday-shortened week as markets were shut on Thursday for the Independence Day holiday. Approximately 5.08 billion shares changed hands on the domestic equity exchanges, as compared to the 6.8 billion share daily average over the past 20 trading days, making it the lowest volume day of the year for a full trading session.
Job Growth Exceeds Expectations
The number of new jobs rebounded strongly in June, with government payrolls surging, but persistent moderate wage gains. Nonetheless, rising evidence the economy is losing momentum could still encourage the Federal Reserve to cut interest rates this month.
The Labor Department’s closely watched employment report on Friday suggested May’s sharp slowdown in hiring was probably a fluke. Lack of concrete progress in resolving an acrimonious trade war between the United States and China, however, means the bar could be very high for the Fed not to lower borrowing costs at its July 30-31 policy meeting.
However, the strong pace of job gains reduced the chances of a half percentage point rate cut at the end of the month. The Fed signaled in June that it could ease monetary policy as early as this month citing low inflation and growing risks to the economy from an escalation in trade tensions between Washington and Beijing.
Nonfarm payrolls increased by 224,000 jobs last month as government employment rose by the most in 10 months, and construction and manufacturing hiring regained speed. The economy created only 72,000 jobs in May.
Job growth averaged 172,000 per month in the first half. Hiring has cooled from an average of 223,000 jobs per month in 2018, in part as the economy runs out of workers. The pace, however, remains well above the roughly 100,000 needed to keep up with growth in the working age population.
The economy, which has expanded a record 10 years, has shifted into lower gear as the stimulus from last year’s massive tax cuts and increased government spending fizzles.
The trade tensions are also dimming the economy’s outlook as they have undercut business confidence and led to a downturn in equipment spending and manufacturing. Consumer spending is rising moderately, and the housing market continues to struggle, while the trade deficit has widened again
Trump and Chinese President Xi Jinping last week agreed to a trade truce and a return to talks. Trump has said he is in “no hurry” to make a deal and on Wednesday accused China and Europe of “playing big currency manipulation game and pumping money into their system in order to compete with USA.”
Trump on Friday called on the Fed to cut rates to boost economic growth. U.S. House of Representative Speaker Nancy Pelosi, a Democrat, welcomed the rebound in job growth, but said “hard-working Americans are still struggling under the Trump administration’s disastrous special interest agenda.”
The Atlanta Fed is forecasting gross domestic product rising at a 1.3% annualized rate in the April-June quarter. The economy grew at a 3.1% pace in the first quarter.
Average hourly earnings rose six cents or 0.2% in June after gaining 0.3% in May. That kept the annual increase in wages at 3.1% in June for a second straight month. The trend in wage growth has slowed from late last year when wages were rising at their fastest rate in a decade, pointing to moderate inflation.
Interest rate futures fully priced in a month-end rate cut but dialed back expectations for an easing of 50 basis points.
Fed Chairman Jerome Powell’s semi-annual testimony to the U.S. Congress on the economy next week could shed light on the near-term outlook for monetary policy. The Fed in its semi-annual report to Congress on Friday repeated its pledge to “act as appropriate” to sustain economic growth.
The unemployment rate rose one-tenth of a percentage point to 3.7% last month as 335,000 people entered the labor market. Some of the recent drop in the jobless rate had been because of people leaving the labor market.
The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, rose to 62.9% last month from 62.8% in May.
A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, rose to 7.2% in June from 7.1% in May.
Hiring picked up across nearly all sectors in June, though retail payrolls contracted for a fifth straight month, shedding another 5,800 jobs on top of the 7,300 lost in May.
Manufacturing payrolls accelerated by 17,000 jobs after rising by 3,000 in May. The surge in hiring is despite the sector struggling with an inventory bulge – concentrated in the automotive industry – trade tensions, design troubles at Boeing (BA.N) and slowing global growth.
Construction employment rose by 21,000 jobs last month after gaining 5,000 in May. Government payrolls rebounded by 33,000, the most since August 2018, after shedding 11,000 jobs in May. The surge in hiring was driven by local governments.
Leisure and hospitality sector payrolls increased by a moderate 8,000 in June after rising 18,000 in the prior month. Professional and business services employment gained 51,000 jobs. There were increases in healthcare and transportation and warehousing employment. The average workweek was unchanged at 34.4 hours in June for a third straight month.