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Labor Report Sparks Solid Rally in Stocks

The U.S. equity markets rallied sharply, posting a third-straight week of gains, turbocharged by an extraordinary May nonfarm payroll report that showed job growth returned sooner than expected, adding to the already-high optimism surrounding the economic recovery from the severe COVID-19 disruption. Treasury yields, especially on the mid-to-long end of the curve, jumped as bond prices fell. The U.S. dollar was modestly higher, trimming a recent slide, and crude oil prices gained solid ground, while gold tumbled. In equity news, Broadcom posted mixed results and lukewarm guidance, Gap reported a larger-than-expected loss, DocuSign provided positive quarterly results and guidance, and Slack Technologies withdrew guidance for billings. Europe also rallied, while markets in Asia saw modest gains.

The Dow Jones Industrial Average soared 829 points (3.2%) to 27,111, while the S&P 500 Index rallied 82 points (2.6%) to 3,194 and the Nasdaq Composite jumped 198 points (2.1%) to 9,814. In heavy volume, 1.5 billion shares were traded on the NYSE and 6.5 billion shares changed hands on the NASDAQ. WTI crude oil rose $2.14 to $39.55 per barrel and wholesale gasoline gained $0.06 to $1.21 per gallon. Elsewhere, the Bloomberg gold spot price declined $31.91 to $1,682.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.3% at 96.96. The markets posted their third-straight week of gains, as the DJIA rose 6.8%, the S&P 500 gained 4.9%, and the Nasdaq Composite increased 3.4%.

Broadcom Inc. (AVGO $317) reported fiscal Q2 earnings-per-share (EPS) of $1.17, or $5.14 ex-items, which matched the FactSet estimate, with revenues rising 4.0% year-over-year (y/y) to $5.7 billion, roughly in line with the Street's expectations. The chipmaker issued Q3 revenue guidance with a midpoint slightly below estimates, saying its outlook for semiconductors reflects a surge in demand from cloud, telecom and enterprise customers, offset by supply chain constraints and an expected substantial reset in wireless. AVGO added that given its strong free cash flow generation, healthy balance sheet and enhanced liquidity position, it remains committed to maintaining its dividend while it navigates these unprecedented times. Shares were higher.

Gap Inc. (GPS $12) posted a Q1 loss of $2.51 per share, much wider than the Street's forecast of a $0.67 per share shortfall, as revenues fell 43.0% y/y to $2.1 billion, south of the projected $2.3 billion. GPS did not provide same-store sales results for Q1, saying that the metric is not meaningful as a result of temporary closures of about 90% of its stores. The company said, "Today we have more than 1,500 stores open in North America, ahead of plan, and as stay at home restrictions ease in many markets, we expect to have the vast majority of our North American stores re-opened in June. We are optimistic that the actions we've taken will provide a stable foundation as we navigate near-term uncertainty and refashion Gap Inc. for long-term growth." Shares were higher.

DocuSign Inc. (DOCU $140) reported a Q1 loss of $0.26 per share, or EPS of $0.12 ex-items, compared to the expected $0.10 per share profit. Revenues rose 39.0% y/y to $297 million, north of the projected $281 million. The eSignature solutions company said its results reflect its ability to help organizations accelerate their digital transformation as they adapt to the changing business environment, magnified by COVID-19. DOCU raised its full-year revenue guidance and issued subscription and billings outlooks that were above estimates. Shares finished lower.

Slack Technologies Inc. (WORK $33) posted a fiscal Q2 loss of $0.02 per share, narrower than the Street's $0.06 per share loss expectation, as revenues grew 50.0% y/y to $202 million, north of the forecasted $189 million. The company said, "We believe the long-term impact the three months and counting of working from home will have on the way we work is of generational magnitude. This will continue to catalyze adoption for the new category of channel-based messaging platforms we created and for which we are still the only enterprise-grade offering." WORK projected a smaller-than-expected loss for the full-year and revenue guidance with a midpoint that was in line with estimates, but it withdrew its outlook for full-year billings amid the ongoing uncertainties surrounding the COVID-19 pandemic. Shares fell.

With the stock markets extending the sharp rally from the deep plunge in March despite the dire economic data that has illustrated the severe disruption of the COVID-19 pandemic, Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Disconnect the Dots: Main Street vs. Wall Street. Liz Ann discusses how the news doesn't get better, but the market's ability to shrug it off continues to breed questions about the perceived disconnect between Main Street and Wall Street. Liz Ann notes that surging liquidity and hopeful virus treatment/vaccine news have been significant tailwinds behind stocks, but heightened complacency could breed risks, with no shortage of potential negative catalysts.

Stay on top of the markets during this unprecedented time by following experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and visiting to see all the content Schwab offers on the unparalleled market action.

May nonfarm payroll report shows employment snaps back from pandemic disruption

Nonfarm payrolls (chart) surprisingly jumped by 2,509,000 jobs month-over-month (m/m) in May, compared to the Bloomberg forecast of a 7,500,000 drop, and following April's upwardly-adjusted fall of 20,687,000. Excluding government hiring and firing, private sector payrolls unexpectedly surged by 3,094,000, versus the forecasted plunge of 6,750,000 after falling by a upwardly-revised 19,724,000 in April. The labor force participation rate rose to 60.8% from April's 60.2% rate, versus an expected dip to 60.1%.

The unemployment rate fell to 13.3% from April's 14.7% rate, versus forecasts of a rise to 19.0%. Average hourly earnings were down 1.0% m/m, versus projections of a 1.0% rise and compared to April's unrevised 4.7% gain. Y/Y, wage gains were 6.7% higher, below estimates of an 8.5% increase. Finally, average weekly hours rose to 34.7 from April's unrevised 34.2, and versus forecasts of a tick higher to 34.3.

The Labor Department said these improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it. In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment in government continued to decline sharply.

Consumer credit, released in the final hour of trading, showed consumer borrowing plummeted by $68.7 billion during April, the fastest pace since 1943, and far more than the $20.0 billion decrease forecast of economists polled by Bloomberg, while March's figure was adjusted to a decline of $6.9 billion from the originally reported $12.0 billion shortfall. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, fell $10.5 billion, a 4.0% decrease y/y, while revolving debt, which includes credit cards, plunged by $58.3 billion, a 64.9% y/y tumble.

Treasuries fell, as the yield on the 2-year note gained 2 basis points (bps) to 0.21%, the yield on the 10-year note increased 8 bps to 0.89%, and the 30-year bond rate rose 4 bps to 1.66%.

Bond yields have moved higher as of late, especially on the mid-to-long end of the curve, amid the rally in the stock markets and the backdrop of the massive amount of monetary and fiscal policy stimulus. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, Stimulus = Inflation? Why It May Be Different This Time, how despite massive fiscal and monetary stimulus, we believe there's little risk of inflation in the next few years.

Europe rallies, with U.S. employment surprise bolstering move, Asia modestly higher

European equities rallied to close out the week and extend a recent run, getting an extra boost from today's surprising surge in May employment out of the U.S., and on the heels of yesterday's larger-than-expected increase of the European Central Bank's (ECB) emergency asset purchase program. The markets shrugged off some disappointing economic data in the region, as German factory orders data for April fell much more than expected, adding to March's drop. The euro traded lower versus the U.S. dollar, but the British pound gained ground on the greenback. Meanwhile, bond yields in the region were mostly higher, though Italian yields lagged behind after yesterday's decline on the ECB's announcement. Schwab's Liz Ann Sonders provides her article, Every Picture Tells a Story: "Chartbook" Look at Economy/Market, offering a visual look at the latest trends and statistics across the spectrum of the economy, policy and the stock market.

The U.K. FTSE 100 Index was up 2.3%, Germany's DAX Index rose 3.4%, France's CAC-40 Index gained 3.7%, Spain's IBEX 35 Index rallied 4.0%, Italy's FTSE MIB Index increased 2.8%, and Switzerland's Swiss Market Index advanced 1.1%.

Stocks in Asia finished out the week in positive fashion, with the global markets remaining buoyed by optimism of recovery in business activity as economies continue to progress with reopening and the relaxing of lockdowns. The recent slide in the U.S. dollar may also be amplifying investor demand for emerging market stocks, while the larger-than-expected increase of asset purchase plans in Europe yesterday added to the lengthy list of global monetary policy stimulus measures aimed at bolstering the economic recovery. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers his article, What's the Future Payback for the Stimulus. Japan's Nikkei 225 Index rose 0.7%, with the yen holding onto a recent decline, while data showed the nation's drop in household spending for April was smaller than expected. China's Shanghai Composite Index advanced 0.4% and the Hong Kong Hang Seng Index rallied 1.7%. South Korea's Kospi Index rose 1.4% and India's S&P BSE Sensex 30 Index moved 0.9% to the upside. Australia's S&P/ASX 200 Index ticked 0.1% higher.

Stocks post three-peat of weekly gains on three catalysts

U.S. stocks rallied for the third-straight week, continuing to be led by the three-headed bullish monster of global economic reopening optimism, the continued flood of global stimulus, and positive developments from the Health Care sector to find an answer to the COVID-19 virus. A host of global manufacturing and services sector reports that showed May output improved from April's sharp downturn appeared to be enough to solidify a third-straight week of gains, but Friday's unexpected rise in May U.S. employment supercharged the advance to close out the week. With the Federal Reserve leading the way in terms of flooding the financial system with liquidity, Europe stepped up its stimulus measures this week, adding to the robust support for a global economic recovery from the severe pandemic disruption. Finally, as the week began, Eli Lilly and Company (LLY $151) was the latest company to report a potential coronavirus therapy, announcing it has begun the world's first study of a possible antibody treatment. The markets shrugged off simmering U.S.-China tensions and civil unrest in the U.S. that spilled over to the world in reaction to the death of George Floyd.

Risk-on sentiment ensued, with cyclically-natured Energy, Industrials and Materials sectors leading the week's sharp gain, while defensively-natured Health Care and Consumer Staples lagged behind but still posted positive figures. The bond and foreign exchange markets also showed signs of reflationary reactions, with the Treasury yield curve steepening noticeably to boost Financials, and the U.S. dollar extending a recent pullback. Crude oil prices continued their sharp recovery as of late and gold came under pressure. Amid the wild swings in the markets, President of the Charles Schwab Foundation, Carrie Schwab-Pomerantz, discusses The Emotional Benefits of Strong Money Management.

Next week, the economic calendar will continue to take center stage, with May reads on consumer, wholesale and import price inflation, along with small business optimism for last month. More timelier data will also come in the form of initial jobless claims for the week ended June 6th and the June preliminary University of Michigan Consumer Sentiment Index. However, in light of Friday's Labor Report that showed a sooner-than-expected return to job growth, the mid-week monetary policy decision from the Federal Open Market Committee (FOMC) is likely to garner heightened attention. The FOMC's decision will be accompanied by updated economic projections from policymakers and followed shortly by the customary press conference from Fed Chairman Jerome Powell. For a look at the Fed's unprecedented relief measures, Schwab's Liz Ann Sonders discusses how the Fed Aims to Help Nurse the Economy Back to Health.

The international economic week will also deliver some reports that could foster a market reaction, with releases slated that are worth noting including: Australia—June consumer confidence. China—May trade balance and inflation figures. Japan—April labor earnings and core machine orders. Eurozone—June investor confidence and April industrial production, along with German April trade data. U.K.—April reads on industrial/manufacturing production and trade balance, along with the Bank of England's inflation forecast for the next twelve months.

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