Prime Highlights:
- U.S. stocks rose to new records after a more-than-anticipated June jobs report.
- Treasury yields rose as investors lowered expectations for an imminent Federal Reserve rate reduction.
Key Fact:
- The U.S. economy added 147,000 new jobs last month, better than expected and lowering unemployment to 4.1%.
- Traders now face less than a 5% chance for a rate reduction in July.
Key Background:
The June US economy was healthier with job gains exceeding forecasts. Companies added 147,000 workers, less than revised May’s total but much bigger than forecast. The unemployment rate dropped to 4.1%, although the decline was aided by the drop in labor participation rate, not new hiring. Still, the report shows a jobs market that continues to drive growth and consumer spending.
Market response was quick and at hand. Nasdaq, Dow Jones, and S&P 500 all ended record highs on the eve of the July 4 holiday, expecting the American economy to be well established. Investors appeared to shift tone — viewing good economic news as a boon for corporate margins, but hushed calls were made for monetary loosening. Wall Street was upbeat on expectation payroll strength would drive further demand among retail, tech, and service stocks.
In Treasuries, Treasury yields rose. The yield on the 10-year note rose some four basis points to 4.34%, and the 2-year note rose nearly ten basis points. Those increases were a stunning reversal of expectations of rates. The chance of a rate cut by the Federal Reserve in July fell below 5%, from near 25% for a few days. That means investors are looking for the Fed to stay on the sidelines even longer now, especially in the face of ongoing job growth and intransigent inflation.
The Federal Reserve is in a delicate position in the future. Inflation pressure is a problem that exists, but the state of the labor market mitigates the need to act in the near term. Policymakers will be watching closely subsequent economic data, including wage growth and core inflation, before they move further. For the moment, however, markets are confident that the American economy will make it through the present cycle without near-term stimulus.
