U.S. stocks got off to a positive start to the second half of the year, helped by another strong jobs report.
All three major equity indexes rebounded last week following two straight weekly losses, with about half of the gains coming on Friday following release of the June employment report. The Dow ended the week with a 0.8% gain while the S&P 500 rose 1.5% and NASDAQ climbed 2.4%. Smaller cap stocks also continued to move higher.
The June jobs reports was positive pretty much up and down the line. Nonfarm payrolls rose by 213,000, about 23,000 more than expected, while May’s total was revised upward by 21,000 to 244,000. The headline unemployment rate rose to 4.0% from 3.8%, but that was due to a positive reason, as the labor participation rate rose to 62.9%. Average hourly earnings increased 0.2% from the prior month, down from May’s 0.3% gain, while the year-on-year increase held steady at 2.7%, which should quell concerns about overheating wage inflation.
In the Treasury bond market, yield spreads continued to narrow, as short-term rates climbed while long-term yields fell. The yield on the three-month and two-year securities rose about two basis points on the week while the yield on the benchmark 10-year note fell four bps to 2.82%. The minutes of the Federal Reserve’s June 12-13 monetary policy meeting indicated that the Fed is intent on carrying out a more aggressive rate-rising program in light of the stronger economy. “Participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020,” the minutes said.
It was not an auspicious way for Asian stocks to open the third quarter, as the major country indexes continued their losing streaks. The Shanghai composite index, for example, dropped 3.5%, its seventh straight weekly loss. The index is down 17% so far this year, with 15% of that loss coming just since May 22. Hong Kong’s Hang Seng index fell 2.2%, its fourth weekly loss in a row and seventh in the past eight weeks. Japan’s Nikkei 225 lost 2.3%, its third straight weekly decline. But European stocks got back on the winning track after two consecutive weekly losses. The Stoxx Europe 600 gained 0.6% while Germany’s DAX index rose 1.5%.
Besides the jobs report, other U.S. economic indicators released last week were uniformly positive. TheInstitute for Supply Management’s widely-watched purchasing managers’ indexes rebounded in June. The manufacturing index climbed 1.5 points to 60.2, well above expectations, while the nonmanufacturing barometer rose half a point to 59.1. Auto sales for June rose by more than 5% compared to the same period last year to an annual selling rate of 17.5 million vehicles, half a million more than forecast; first-half sales were up nearly 2%. Factory orders and construction spending were both up 0.4% in May.
Reports/dates/facts/links worth paying attention to over the next week:
1. July 9: Consumer credit for May.
2. July 11: Producer price index for June.
3. July 12: Weekly unemployment claims; consumer price index for June.
4. July 13: University of Michigan consumer sentiment index for July, first reading.