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Upbeat Labor Report Cools Rate Cut Hopes, Stocks Fall

The U.S. equity markets finished out the holiday shortened week lower, but notched gains for the week, as a stronger-than-expected labor report cooled elevated Fed rate cut expectations. Treasury yields and the U.S. dollar were higher, while gold fell and crude oil prices gained slight ground. Equity news was in short supply, but could begin to heat up with Q2 earnings season right around the corner.

The Dow Jones Industrial Average (DJIA) declined 44 points (0.2%) to 26,922, the S&P 500 Index lost 5 points (0.2%) to 2,991, and the Nasdaq Composite shed 8 points (0.1%) to 8,162. In light volume, 578 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.17 higher to $57.51 per barrel and wholesale gasoline was up $0.01 at $1.93 per gallon. Elsewhere, the Bloomberg gold spot price decreased $15.18 to $1,400.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.5% to 97.25. Markets were higher for the week, as the DJIA increased 1.2%, the S&P 500 Index gained 1.7% and the Nasdaq Composite rose 1.9%.

Equity news was light following yesterday's Independence Day holiday break, but Q2 earnings season is looming and Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Another Last Goodbye: U.S. Stocks' Roller Coaster 18 Months, U.S. stocks are cheering the weekend trade truce in their latest march to new highs and since early 2018, the S&P 500 has made little headway, but with a lot of interim lows and highs. She adds that cyclicals led the market during last year's first half, but have since given way to more defensive leadership. Liz Ann concludes that late-cycle phases bring heightened risks; and notwithstanding the latest march to new highs, we continue to recommend investors don't get out over their (water) skis.

June employment report shows job growth above forecasts after May's disappointment

Nonfarm payrolls (chart) grew by 224,000 jobs month-over-month (m/m) in June, compared to the Bloomberg forecast of a 160,000 increase. The rise of 75,000 seen in May was revised to a gain of 72,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 191,000, versus the forecasted gain of 150,000, after rising by 83,000 in May, revised from the 90,000 increase that was initially reported. The report showed that notable gains occurred in professional and business services, in health care and in transportation and warehousing.

The unemployment rate ticked higher to 3.7% from May's 3.6% rate, where it was forecasted to remain, as the labor force participation rate nudged higher, while average hourly earnings were up 0.2% m/m, versus projections to match May's upwardly-revised 0.3% increase. Y/Y, wage gains were 3.1% higher, matching May's unadjusted gain and compared to estimates calling for a 3.2% increase. Finally, average weekly hours remained at May's 34.4 rate, in line with estimates.

Treasuries fell, as the yield on the 2-year jumped 11 basis points (bps) to 1.87%, the yield on the 10-year note was up 10 bps to 2.05%, while the 30-year bond rate gained 8 bps to 2.55%. The U.S. dollar also moved noticeably higher following the economic data. For a look at the bond markets check out Schwab's Chief Fixed Income Strategist Kathy Jones' Fixed Income Mid-Year Outlook: "Lower for Longer" is Back, in which she notes that we feel fixed income returns should remain positive in the second half of the year, but probably won't repeat the first half's sharp gains. Also, check out our 2019 Mid-Year Outlook: Rate Expectations, where we discuss that recession risk is rising, but markets expect central banks to keep it at bay by cutting short-term interest rates and address if it will it be enough to keep the stock market rally going.

Europe falls following mixed global economic data, Asia mixed

European equities finished lower, as the markets digested some mixed economic data from both sides of the pond, while geopolitical concerns remained elevated. German factory orders fell much more than expected in May, ahead of today's highly-anticipated June U.S. labor report that showed job growth was solidly above expectations on the heels of May's softer-than-anticipated gain. The euro and British pound saw some pressure versus the U.S. dollar, while bond yields in the region gained ground. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his Global Stocks Mid-Year Outlook, in which he points out that in the second half of 2019, stock markets around the world will likely have to contend with slowing global economic growth as leading indicators point to an increasingly vulnerable world economy that may be worsened by shocks from trade tariffs and other factors. Jeff adds that the potential for reversals in long-term market performance trends may catch unprepared investors by surprise, suggesting investors should ensure they have an appropriate amount of broad international exposure, including both emerging and developed markets, in their portfolios to potentially benefit from opportunities for performance and diversification.

Stocks in Asia finished mixed amid some apparent caution ahead of today's June employment report in the U.S., while U.S.-China trade tensions remained cooled after the last weekend's G-20 summit that delivered a tariff truce. Japanese equities gained ground, with the yen slipping late in the session, even as the nation's household spending in May rose much more than forecasted. Stocks in mainland China moved higher, but those traded in Hong Kong dipped. Markets in Australia advanced and shares in South Korea ticked higher. Meanwhile, Indian securities fell sharply, with the markets scrutinizing the country's annual budget release that seemed to dampen expectations of government stimulus measures and included an additional tax on upper income individuals. Amid the swings in the global markets in the past 18 months, Schwab's Jeffrey Kleintop, CFA, offers some analysis for investors navigating the choppy environment in his commentary, Diversification: Finally Back After 20 Years. He points out that the lower correlation between the world's stock markets enhances the potential risk-reducing benefits of diversification.

Stocks move back to record high territory

U.S. stocks gained ground in the holiday-shortened week, resuming a recent run back into record high territory, with trade concerns cooling after last weekend's G-20 summit in Japan delivered a tariff truce between the U.S. and China. However, the weekly advance was trimmed after Friday's June Labor Report showed job growth rebounded more than expected from May's soft reading, tempering Fed rate cut estimates. The markets shrugged off ISM reports on U.S. manufacturing and non-manufacturing output that showed growth slowed in June, growing geopolitical concerns and the looming Q2 earnings season. The U.S. dollar snapped a two-week losing streak and Treasury yields rebounded sharply after a slide that took the 10-year rate to lows not seen since late 2016. Crude oil prices gave back some a two-week rally, as crude oil inventories dropped for a second week and OPEC agreed to extend production cuts.

This sets the stage for next week's economic calendar that will be robust and accompany the unofficial start to earnings season, with NFIB Small Business Optimism and the JOLTS Job Openings reports getting the ball rolling, followed by the Fed's minutes from its June monetary policy meeting where it left its stance unchanged but changed its "patient" language from its statement. Inflation will be in focus, courtesy of the releases of the Consumer Price Index and Producer Price Index, but the headlining event will likely be the two-day semiannual Congressional testimony from Fed Chairman Jerome Powell.

As noted in our latest Schwab Market Perspective: Running in Place, the past 18 months have been marked by major swings, but ultimately little movement. Economic data has yet to reflect a significant impact from the trade war, but that's unlikely to last if the stalemate drags on and/or if the next round of tariffs kick in. The burning question is whether the Fed has sufficient ammunition to offset a trade-related slowdown or recession. As well, geopolitical tensions have heated up, but market reactions to past escalations have been relatively limited.

International reports due out next week that deserve a mention include: Australia—consumer confidence. China—lending statistics, inflation figures and trade balance. India—consumer price inflation and industrial production. Japan—machine orders, wage figures and industrial production. Eurozone—investor confidence and industrial production, along with the German trade balance. U.K.—industrial/manufacturing production and trade balance.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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