foxex: Bad News First

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Jobs Tank, Markets Surge
2. Fed Rate Cut in July?
3. Bond Yields Resume Retreat
4. Mexico Tariffs May Be Averted
5. U.S. Inflation in Focus

Markets Closed

Dow
25,983.94 +1.02%

S&P
2,873.34 +1.05%

Nasdaq
7,742.10 +1.66%

VIX
16.3 +2.32%

Bitcoin
$8,000.54 +3.79%

US 10-Yr Yield
2.084 -1.88%

Year-to-Date

Dow
25,983.94 +11.30%

S&P
2,873.34 +15.59%

Nasdaq
7,742.10 +16.68%

Russell 2000
1,514.39 +13.19%

Crude Oil
54.09 +18.05%

US 10-Yr Yield
2.084 -23.83%

Jobs Tank, Markets Surge

It might seem a bit counterintuitive at first. The U.S. jobs report for May, released on Friday morning, revealed the second worst monthly pace of job creation in 20 months – less than half the number of jobs that were expected. Then the stock market surged sharply, extending its recent relief rally.

Is substantially slowing job growth a catalyst for higher stock prices? Not typically. But when you take a closer look, it's clear that markets rallied on the higher likelihood of a Federal Reserve interest rate cut as early as July, due in part to Friday's dismal employment numbers.

According to the U.S. Labor Department, the U.S. economy added only 75,000 jobs in May, far lower than the 177,000 consensus forecast prior to the release. This was in sharp contrast to the previous two months, which were both significantly better than expected. Additionally, Friday's report revealed that wage growth in May was also lower than expected. The unemployment rate, as previously forecast, remained at a 50-year low of 3.6%.

Earlier in the week, ahead of Friday's release, the ADP private employment numbers gave an inkling as to what was to come. ADP private payrolls for May rose by only 27,000 jobs against a consensus forecast of 185,000.

Fed Rate Cut in July?

The sheer disappointment in job creation strongly reinforced investor expectations of a Fed rate cut sooner rather than later. For most of this past week, equity markets have been rallying in large part on assurances from Fed Chair Jerome Powell that the Fed will do what it takes to keep the economic expansion going. Investors interpreted Powell's words as a rather blatant indication of an impending interest rate cut, which helped to boost stock prices sharply.

Prior to Friday's jobs report, billionaire hedge fund manager Stanley Druckenmiller told CNBC that if the employment number was weak, the Fed would "be on a clear easing path by July." By easing, Druckenmiller was referring to cutting interest rates. As we now know, the jobs number was indeed weak – very weak. And investors quickly began to bet even more heavily on a rate cut either in July or shortly thereafter.

CME's FedWatch tool (shown below) reveals how options traders are handicapping the likelihood of an interest rate hike or cut in the next several FOMC meetings. As of Friday afternoon, well after the jobs report, markets now see the likelihood of a rate cut in July at north of 85%. This is a sharp rise in expectations for a July rate cut from prior to the jobs release. For a rate cut by December, the probability goes even higher, to around 98.5%.

Here's the FedWatch chart for July:

Bond Yields Resume Retreat

As might be expected when markets predict lower interest rates, bond yields declined yet again on Friday. The benchmark 10-year U.S. Treasury yield briefly dropped to a new low not seen since September 2017. The yield has been tanking since November of last year. Given the Fed's likely rate-cutting mode going forward, bond yields could continue to fall.

Here's a chart of the 10-year yield since the last time it was this low:

Mexico Tariffs May Be Averted

For the past week, investors have had something else on their minds besides the Fed – President Trump's recent politically-charged threat of imposing a 5% tariff on all goods imported from Mexico. So far, negotiations have failed to yield significant progress. However, investors were optimistic on Thursday when reports surfaced that the U.S. is considering delaying the imposition of tariffs past Monday. And on Friday, Trump tweeted: "If we are able to make the deal with Mexico, & there is a good chance that we will, they will begin purchasing Farm & Agricultural products at very high levels, starting immediately." This suggests a good potential for a resolution, or at least a delay, in the implementation of the tariffs.

U.S. Inflation in Focus

In the week ahead, markets will likely have to continue contending with Trump's Mexico tariff situation as well as the ongoing U.S.-China trade conflict. Yields and interest rates will also be at the forefront of investors' minds, especially given the key U.S. inflation releases slated for next week. The monthly Producer Price Index is scheduled for Tuesday, while the more widely watched Consumer Price Index is scheduled for release on Wednesday. Inflation data is crucial in helping to inform Fed interest rate decisions.

Overall, despite ongoing trade and economic growth concerns, markets had an exceptionally strong week. We're hoping it continues in the week ahead. Have a great weekend!

More News:

Roku Shares Are Alerting Big Buy Demand

Why ETFs are Stock Pickers' Best Protection as Market Liquidity Plunges

How Tesla Could Rebound Like Netflix

chart courtesy www.koyfin.com

Vertex Pharmaceuticals rose more than 3% today on news of the company acquiring a biotech company called Exonics Therapeutics, specializing in gene therapy. The company will also enter into a licensing agreement and collaboration with the gene-therapy company CRISPR Therapeutics (CRSP).

Arista Networks fell more than 4% today, as Morgan Stanley lowered its target price for the the stock from $300 to $275.

Word of the Day

Expansionary Policy

With the jobs report today, the market seems to think that the Fed will cut interest rates by July. When the Fed cuts interest rates in order to encourage economic growth, there's a name for that: Expansionary Policy.

Read more about it here:

"Expansionary policy is a form of monetary policy that seeks to encourage economic growth or combat inflationary price increases by expanding the money supply faster than usual or lowering short-term interest rates. It is enacted by central banks and comes about through open market operations, reserve requirements and setting interest rates.

Expansionary policy differs from fiscal policy, which includes tax cuts, transfer payments, rebates and increased government spending on projects such as infrastructure improvements.

The U.S. Federal Reserve employs expansionary policies whenever it lowers the benchmark federal funds rate or discount rate, decreases required reserves for banks or buys Treasury bonds on the open market. Quantitative easing, or QE, is another form of expansionary monetary policy."

*credit: Tim Matsui / Stringer

Today in History

June 7th, 2000 - The U.S. District Court Judge Thomas Penfield Jackson finalizes his ruling that Microsoft is a monopoly under the Sherman Antitrust Act. He orders that the company be split in two and placed under various restrictions. Microsoft announces its plans to appeal the ruling.

The Wall Street Journal, June 8, 2000, pp. A1, A3, C1

*This picture was taken on June 28, 2001, after the U.S. Court Appeals overturned a lower's court ruling to break up the company.