Stocks See Solid Gains Following Jobs Report

Charles Schwab: On the Market

Posted: 7/8/2016 4:15 PM ET

Stocks See Solid Gains Following Jobs Report

U.S. stocks rallied early and never looked back in the wake of the June labor report which showed a solid improvement in monthly job creation, though the unemployment rate ticked higher and growth in average hourly earnings was shy of forecasts. Treasuries were mixed following the jobs report, while in the final hour of trading consumer credit was shown to have expanded more than expected. Crude oil prices edged lower, the U.S. dollar was nearly unchanged and gold was slightly higher.

The Dow Jones Industrial Average (DJIA) rallied 251 points (1.4%) to 18,147, the S&P 500 Index surged 32 points (1.5%) to 2,130, and the Nasdaq Composite jumped 80 points (1.6%) to 4,957. In moderately heavy volume, 920 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $0.27 higher at $45.41 per barrel, wholesale gasoline added $0.01 to $1.37 per gallon and the Bloomberg gold spot price increased $5.89 to $1,366.34 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.25. Markets were higher for the week, as the DJIA gained 1.1%, the S&P 500 Index increased 1.3% and the Nasdaq Composite rallied 1.9%.

Gap Inc. (GPS $23) reported that net sales for the five-week period ended July 2, 2016 rose by 2% to $1.57 billion, compared to a 1% decline a year ago, with growth from its Old Navy segment driving the results for the clothing retailer. Shares of GPS finished nicely higher.

Polycom Inc. (PLCM $12) announced that it has agreed to be acquired by privately-held Siris Capital Group LLC for a price of $12.50 per share in cash. The offer is subject to PLCM's termination of its existing merger agreement with Mitel Networks Corp. (MITL $7). The transaction is valued at roughly $2.0 billion, including debt, a 13.6% premium over its previous offer from MITL. Shares of both companies closed sharply higher.

U.S. jobs jump, but unemployment ticks higher, while consumer credit tops estimates

Nonfarm payrolls (chart) rose by 287,000 jobs month-over-month (m/m) in June, compared to the Bloomberg forecast of a 180,000 increase. The disappointing rise of 38,000 seen in May was downwardly revised to a gain of 11,000 jobs. The total downward revision to job gains in May and April was 6,000. Excluding government hiring and firing, private sector payrolls increased by 265,000, versus the forecasted gain of 170,000, after declining by 6,000 in May, negatively revised from the 25,000 rise that was initially reported. Gains were seen in professional & business services with an increase of 38,000 jobs, telecommunications, with a 28,000 rise following the 32,000 decline registered in May due primarily to the Verizon strike, while manufacturing jumped 14,000.

The unemployment rate rose to 4.9% from 4.7%, compared to expectations of an increase to 4.8%, while average hourly earnings grew by 0.1% m/m, below projections of a 0.2% increase, and May's 0.2% rise was unadjusted. Finally, average weekly hours remained at May's unrevised 34.4 hours level, matching projections.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $18.6 billion during May, topping the $16.0 billion forecast of economists polled by Bloomberg, while April's figure remained near a level of $13.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $16.2 billion, while revolving debt, which includes credit cards, rose by $2.4 billion.

Treasuries were mixed, with the yield on the 2-year note increasing 2 basis points (bps) to 0.61%, while the yield on the 10-year note decreased 3 bps to 1.36%, and the 30-year bond rate declined 4 bps to 2.10%. Bond yields have seen pressure lately, falling to record lows, as the global markets continue to grapple with the impact of the U.K. Brexit vote, and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones. Also, for more on the Brexit fallout with a focus on sectors, see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, at www.schwab.com/marktetinsight, while you can also follow Schwab on Twitter: @schwabresearch.

European markets get a boost from U.S. labor report, Asia mostly lower

European equities finished the week on a high note, notching solid gains following an upbeat U.S. labor report. The British pound continued to slowly recover from its rout that pushed it to a 31-year low versus the U.S. dollar this week in the wake of the Brexit vote, while a one-off special consumer confidence survey in the U.K. to measure sentiment following the Brexit vote showed a drop to a reading of -9 from the -1 posted in an earlier, regularly-scheduled monthly release. For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop. Additional economic news in the region was mixed, as trade data out of Germany and the U.K. were mostly in line with forecasts, while industrial production in France fell short of expectations. The euro lost ground versus the U.S. dollar, while bond yield in the region were lower.

Stocks in Asia finished mostly lower, as the post-Brexit rally lost steam amid global growth concerns, ahead of the release of Friday's U.S. employment report. Flight-to-safety continued to boost the yen, pushing Japanese equities lower, while some attention may have shifted to the country's upper house elections, to be held this weekend. Australian securities ticked higher despite a sharp cut in the forecast for iron ore prices from the nation's Department of Industry, Innovation and Science, and following the credit outlook downgrade from Standard & Poor's on Thursday. Chinese stocks were lower amid rising worries over the country's banking sector, after a report showed non-performing loans exceeded $299.2 billion in May, upping banks' bad-loan ratio to 2.15%. Meanwhile, South Korean equites fell and Indian listings also lost ground.

Jobs report gives boost to stocks

Despite a sluggish start, U.S. stocks were higher for the holiday-shortened week as equities rallied on Friday, shaking off some of the post Brexit hangover, with the Dow topping 18,000 and the S&P 500 closing above 2,100. Gains for stocks transpired on the heels of the June labor report, which showed a solid improvement from May's disappointing figures for jobs created during the month. Our experts note in the recent Schwab Market Perspective: Looking Beyond Britain, that healthy job growth and the possible support to inflation from higher wages lead us to wonder if market expectations around Fed policy may have gone too far. The futures market indicates roughly no chance of a hike for the balance of the year; while rate cut expectations have come back in play. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

In addition to the jobs data, some other positive domestic economic reports included a decline in weekly jobless claims and a jump in mortgage applications, while the Institute for Supply Management (ISM) non-Manufacturing Index showed growth accelerated more than expected, rising to 56.5 in June, the highest since November 2015. However, factory orders declined and durable goods orders were revised to a 2.3% drop, slightly lower than the initial estimate.

Unofficial start to 2Q earnings season next week

Next week's economic docket will heat back up, with key releases of retail sales, the Consumer Price Index (CPI), the Producer Price Index (PPI), the Fed's Beige Book, industrial production and capacity utilization, along with the preliminary University of Michigan Consumer Sentiment Index for July.

2Q earnings season will also unofficially kick-off next week as Alcoa Inc. (AA $11) is expected to report results after the close on Monday. As noted in the recent Schwab Market Perspective, some questions have come to light recently regarding what consequences the uncertainty in Europe and a potential strengthening of the U.S. dollar may have. We'll start to get an initial view on those questions in the next few weeks as second quarter earnings season ramps up. Read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

International reports slated for next week include: Japan—machine and machine tool orders, PPI, industrial production and capacity utilization and the Tertiary Industry Index. China—foreign direct investment, trade data, industrial production, retail sales and 2Q GDP. India—car sales, CPI, industrial production and trade data. U.K.—construction output and the Bank of England will announce its rate decision. Germany—Wholesale Price Index and CPI. Eurozone—industrial production, trade balance and CPI.

FINANCIAL REVIEW

Jobs Report Friday

Sinclair Noe — November 7, 2014

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 19 = 17,573
SPX + 0.71 = 2031
NAS – 5 = 4632
10 YR YLD – .06 = 2.31%
OIL + .60 = 78.51
GOLD + 36.50 = 1178.80
SILV + .32 = 15.85

The economy added 214,000 net new jobs in October. The unemployment rate dropped from 5.9% to 5.8%. The 5.8 percent official unemployment rate is the lowest since the summer of 2008.

The August report was revised higher to 203,000 and the September report was revised higher to 256,000; for a net increase of 31,000 jobs added from revisions. Employment is now up 2.64 million year-over-year, and up 2.3 million year to date. So far in 2014 the US has gained an average of 229,000 jobs a month, the fastest pace since 1999. October was the ninth consecutive month of 200,000 or more jobs gained, and that hasn’t happened since 1994. Total employment is up 10 million from the employment recession low and up 1.3 million from the previous peak; although it should be noted that full-time employment has not returned to the previous peak, while part-time employment is quite a bit higher than the peak. Private employment is up 10.6 million from the employment recession low.

This latest report represents 56 consecutive months of private-sector job growth, which represents the longest streak in US history, but it isn’t the strongest streak of job growth. The strongest recovery came in the early 1950s, a 13-month stretch that averaged 315,000 jobs created per month. And then there was the period from 1993 to 2000, an 85 month stretch that was interrupted in January 1996, when payrolls dropped 2,000 mainly due to blizzards and bad winter weather.

The net job growth of 214,000 was just a bit below analysts’ estimates of 225,000 to 235,000, but it wasn’t enough to send a shock wave; it was right in line with the trends for the past year. And this is the initial estimate, and revisions have been typically adding about 28,000 jobs to the initial estimates.

The Labor Department statisticians separately survey households, asking people if they have a job. This alternative measure of employment receives less emphasis, because it tends to be extremely volatile. Bearing this disclaimer in mind, it is notable that the household survey suggests that employment grew by an impressive 683,000 in October.

Also, a point to consider is that the numbers were seasonally adjusted; they always are; the adjustment smooths out volatility. In non-seasonally adjusted terms it was the best October for job growth ever, with 1.064 million net jobs created during the month. The previous record for an October was 980,000 in 2004. Now there are many reasons for seasonal adjustments, holiday workers, jobs that follow the seasons, teachers on break for the summer and then returning, census workers; and that is why the number is volatile and not used in most calculations. So, I’m not sure what to make of it, other than to say there is an anomaly, and it is a positive anomaly, and don’t be surprised if we see a big revision on the initial number.

The Labor Force Participation Rate increased in October to 62.8% from 62.7% in September. This is the percentage of the working age population in the labor force. So, it looks like a few people are coming back into the labor pool. Of course, over the past 6 years, millions of Americans left the workforce, and have not returned; the boomer generation is reaching retirement age, and whether they want to or not, many are retiring. There are now 37 million boomers over age 65, and another 50 million over age 55. This is a massive demographic shift. The boomers have had an outsized influence on everything ever since they were born, why should it change when they go into retirement?

Now, sometimes the unemployment rate goes down because people drop out of the labor pool but that was not the case in October; more people joined the labor pool in October and the unemployment rate went down because they found jobs.

There are 2.91 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.95 in September. Over the past year there has been a sizable decrease in the number of discouraged workers who have given up hope of finding a job, down 1.2 million; and the number of part-time workers who wanted full-time employment, down 1 million.

The number of persons working part time for economic reasons decreased in October to 7.02 million from 7.10 million in September. These workers are included in an alternate measure of unemployment known as U-6, which decreased from 11.8% in September to 11.5% in October.

The still large numbers of long term unemployed and underutilized workers is probably the best explanation for stagnant wage growth.

In late 2009, the unemployment rate for men topped 11%; for women, the unemployment rate never got past 9%. Now, the tide has turned and the unemployment rate for women is 5.9%, while the unemployment rate for men is 5.6%.

The October unemployment rate for workers age 25 and older with no high school diploma is 7.9%; for high school grads the rate is 5.7%; for workers with some college the unemployment rate is 4.8%, and for workers with a bachelor’s degree or more the unemployment rate is 3.1%.

Hiring in October was strongest at retailers, restaurants and bars; industries that typically boost employment ahead of the holidays. Leisure and hospitality added 52,000 jobs and retailers created 27,000 openings. Most of these jobs pay below the average national hourly wage. The health-care sector added 25,000 employees and professional jobs grew by 37,000. Manufacturers hired 15,000 workers and the construction trade added 12,000. Most of these jobs pay more than the average hourly wage, though half of the white-collar hires in October were temps who earn significantly less. State and local governments lost jobs for 4 straight years, but that trend is slowly changing and in October, state and local government added 8,000.

Only about 40% of the new jobs created in October were in fields that pay above the average hourly U.S. wage of $24.57. That’s down from 60% in September. There has been a slight shift to higher paying jobs, with 58% of the new jobs created this year paying above the average hourly wage, compared to 50% in 2013.

Average hourly wages were little changed in October. Hourly pay rose 3 cents to $24.57, putting the 12-month increase at 2%, the Labor Department said Friday. Year-over-year increases have ranged from 1.9% to 2.2% in the past two years. This suggests that despite the tightening labor market, employers are able to attract a sufficient number of applicants that they do not yet need to bid up wages. The amount of time people worked each week, however, rose a tick to 34.6 hours and sat at a post-recession high. Hours tend to increase as an economy strengthens.

And while average hourly wages are stuck in a 2% rut, the average weekly wages are starting to move up slightly. Workers aren’t getting more per hour, but they are getting more hours. Average weekly wage growth came in at 2.85% in October, the fourth month it has been above 2.5% growth rate. Now, that’s still indicates slack in the labor market, but it is a little less slack. Again, we need to see hourly and weekly wage growth moving to about 3.5% or 4%, but it would make sense that the weekly average leads the hourly average.

For now we do not have wage push inflation. The Federal Reserve will likely look at today’s report and conclude they are on course. If the economy adds about 229,000 jobs per month (that’s the average for 2014), then the unemployment rate would drop to 5.5% within the next 5 months. That is when the debate will get hot about the Fed raising interest rates.

Five years ago, we would have considered this a fantastically great jobs report; but wages are not growing; everybody feels overworked and underpaid. And you may not realize it but we keep moving closer and closer to a position of strength in the labor market.

*Note: forgive me for not including appropriate links. I’m still working out some issues related to this revision of the website, but here is a link for your weekend reading pleasure – http://www.rollingstone.com/politics/news/the-9-billion-witness-20141106