U.S. equities reversed from early losses on Friday to close with modest gains after a disappointing April jobs report. Nonfarm payrolls increased 160,000 for the month, below the 200,000 gain expected and a decline from the revised 208,000 gain in March. February’s result was also revised lower. The unemployment rate held steady at 5.0%.
This was the first result in seven months.
In the end, the Dow Jones Industrial Average gained 0.5%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.4% and the Russell 2000 gained 0.6%. Treasury bonds weakened, the dollar was little changed, gold gained 1.7% and oil gained 0.8%.
Energy got a lift on supply disruption concerns. Alberta’s Athabasca oil-sands fire continued to rage, with Reuters estimating at least 720,000 barrels per day in production offline. Nigerian production has fallen to 20-year lows following militant attacks. And the political conflict in Libya remains unresolved.
The tech sector was in focus with Yelp Inc (NYSE:YELP) rising 23.7% on a revenue and earnings beat while FireEye Inc (NASDAQ:FEYE) dropped 19% on lower guidance. JCPenney Company Inc (NYSE:JCP) fell 7.5% after the New York Post reported the company slashed payroll, froze overtime, and took other emergency steps in response to surprisingly light April sales.
Overall, material stocks led the way with a 0.9% gain followed by technology up 0.7%. Utility stocks were the laggards down 0.7%.
There was more bad news on the jobs front. The labor force participation rate reversed its recent uptrend, slipping 0.2% to 62.8%. The one bright spot was a slight increase in wages, pushing the annual growth rate to 2.5%.
All of this comes in the context of a spate of weak U.S. data, including soft consumer spending (as the savings rate rises), an underwhelming Q1 GDP growth report, and ongoing stalling in the manufacturing sector. The result has been a hook down in the Citigroup Economic Surprise Index which measures where the economic data is coming in relative to analyst expectations.
Philippa Dunne of the Liscio Report notes that the jobs report is just the latest evidence the labor market is slowing. The Federal Reserve’s labor market conditions indicator — a composite of 19 separate employment indicators — has been negative for three consecutive months and “looks to have peaked for the cycle” suggesting we’ve already seen the best pace of job gains for this expansion and that things are at risk of slowing from here.
She adds that the LMCI tends to peak about nine months before the business cycle does. So watch for possible evidence of a recession come autumn.
This timing coincides with Wall Street’s expectation for the next interest rate hike from the Federal Reserve. Ethan Harris at Bank of America Merrill Lynch now expects another 0.25% rate hike in September followed by another in March — a shift from the previous call for a hike in June and December.
The change is based on a loss of momentum in the U.S. economy, a Fed engaged in “opportunistic reflation” targeting inflation above 2%, and uncertainty related to recent market volatility, the U.K. referendum on the European Union, and the upcoming U.S. presidential election.
The weak jobs numbers was according to Harris “the last of a string of softer indicators that has prompted us to change our forecast.” But he remains hopeful, noting “the economy is still expanding, inflation is still accelerating and the Fed is still normalizing.”
NY Fed President and policy dove William Dudley commented that despite the soft April report two rate hikes in 2016 is still a reasonable expectation. If Dudley’s sentiments are echoed by other policymakers, watch for a possible drop by the Dow Jones below its 50-day moving average for the first time since February as traders worry about a June rate hike.
As a result, I’ve been focusing on areas of weakness such as Apple Inc. (NASDAQ:AAPL) as Edge Pro subscribers enjoy a near 290% gain in their May $107 puts as shares risk a drop below their August-January/February lows.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
