It may be difficult to tell from the stock market’s pullback from the end of last week, but it was actually a stronger week for economic news.
Of course, what dominated the headlines on Friday was the Labor Department’s announcement that nonfarm payrolls rose 280,000 in May. Not only was this substantially better than economists’ consensus estimate of 225,000, it also represented the largest monthly increase since December.
And, for the first time this year, there were no substantial downward revisions in the previous months. Instead, March payrolls were revised up 34,000 to 119,000, and April payrolls were revised down 2,000 to 221,000. These revisions are a big deal, because the household survey oftentimes double counts those with multiple temporary jobs.
At the same time, the unemployment rate rose to 5.5% in May, up from 5.4% in April. This was because 397,000 more people decided to look for work. And while labor force participation rose to 62.9% in May, up from 62.8% in April, it is still near the lowest level in 37 years. Overall, the May payroll report was a pleasant surprise, especially the positive revision for March.
I should add that on Wednesday, ADP reported that private payrolls rose to 201,000 in May, which was the highest level in the past four months. Especially encouraging was that small businesses added 122,000 new jobs, compared with 65,000 for medium-sized businesses and just 13,000 for large businesses. Typically, small business job growth corresponds with rising business confidence.
As I’ve discussed previously, one part of the Federal Reserve’s dual mandate is to promote maximum employment. So, whenever there’s a positive jobs report, this renews speculation that the Fed will feel comfortable to raise interest rates sooner, rather than later. This is one reason that we saw some choppiness last Thursday, after the strong ADP report and the announcement that weekly jobless claims remained near a 15-year low.
Nonetheless, I still do not expect the Fed to raise rates this year. That’s partly because the second part of the Fed’s dual mandate is to maintain stable prices.
Well, last Monday, the Commerce Department announced that the core personal consumption expenditure (PCE) index — the Fed’s favorite inflation indicator — rose just 0.1%. This was below economists’ expectations of a 0.2% increase. Over the past year, the core PCE index has risen 1.2% — well below the Fed’s 2% target.
So, for the most part, I’m sticking with my predictions. However, there is one development across the pond that may change things, and that’s what’s going on with Greece.
Clearly, a deal is in the works for Greece to make another payment to the International Monetary Fund in exchange for more debt restructuring and economic reforms. It appears that Greece is going to have its debt restructured again, which is essentially a managed default that will be politically acceptable to both sides.
In the meantime, the Greece situation is affecting bond markets; for example, the German 10-year bond has risen from only 0.05% several weeks ago to 0.85% this week. The rising rates in the Eurozone are also putting upward pressure on U.S. Treasury yields.
I must admit that if market rates continue to rise, the Fed may be forced to step in and begin raising key interest rates in the coming months. However, it’s too soon to tell. I will revisit this once the final scene in the “Greek tragedy” plays out in the upcoming weeks.
For now, the Fed is facing intense pressure to keep rates where they are. On Thursday, the IMF called upon the Federal Reserve to delay raising U.S. interest rates until the first half of 2016. The IMF also lowered its 2015 forecast for U.S. GDP growth to 2.5%, down from 3.1% previously.
The IMF attributed the downgrade to an unusually long and cold winter, the west coast port strike and the stronger U.S. dollar. Further, the IMF predicted that inflation won’t near the Fed’s 2% target rate until mid-2017.
If the Fed were to raise rates too soon, the IMF believes that this could destabilize international financial markets. Overall, the Fed and the IMF alike do not want key short-term interest rates to rise, but it will all depend on how market rates react after the latest Greek tragedy is concluded.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
