Stocks are soared on Friday in response to the April jobs report, which largely came in according to expectations: Payrolls expanded by 223,000 and the unemployment rate fell to 5.4%, the lowest level since early 2008.
Job gains were concentrated in white-collar and health care areas, construction saw modest gains, and manufacturing was largely flat.
On the surface, it looks like investors were celebrating a nice bounce for the labor market after a winter stall.
But a look at the details suggests otherwise. Overtime, hours worked and wage growth all disappointed; suggesting Federal Reserve officials will pull both a June and a September rate hike off the table — which is the real reason the bulls got so excited.
In the end, the Dow Jones Industrial Average gained 1.5%, the S&P 500 gained 1.3%, the Nasdaq Composite gained 1.2% and the Russell 2000 gained 0.8%.
It wasn’t just about stocks as Treasury bonds, crude oil, precious metals, and the dollar all finished higher. That lifted the ProShares Ultra Silver ETF (NYSEARCA:AGQ) recommended to Edge subscribers to a 2.1% gain. Bolstered hopes for a continuation of ultra-cheap money set off a round of panic buying.
Biotech boosted the healthcare sector to a 1.6% gain with Biogen Inc (NASDAQ:BIIB) up nearly 4%. Syngenta AG (ADR) (NYSE:SYT) rose 11.4% after rejecting a $45 billion takeover approach from Monsanto Company (NYSE:MON). AOL, Inc. (NYSE:AOL) gained 10.2% on better-than-expected revenues and earnings.
Monster BeverageCorp (NASDAQ:MNST) lost 10.5% after missing Q1 earnings expectations on weaker international sales and higher expenses.
Back to the jobs numbers and the impact on the Fed: The futures market now puts the probability of a December rate hike at 51% (with increasing odds of an early 2016 rate hike).
Still, it’s worth remembering that stocks have been rattled recently by rising inflation expectations — based on the idea of a delayed Fed rate hike in the context of a bounce back in the economy — which has acted to push up long-term bond yields. If the Fed waits too long for confirmation that the job market merely suffered a weather-related short-term setback earlier this year, it risks amplifying this dovish Fed/higher bond yield dynamic, which is something they don’t want.
It’s not going to be an easy call when Fed policymakers gather for their next meeting in the middle of June. The data is decidedly mixed.
Deutsche Bank chief U.S. economist Joseph LaVorgna sounded optimistic in a note to clients Friday afternoon, saying the April “labor market thaw” keeps the Fed on track for a September rate liftoff.
Aneta Markowska at Societe Generale focused on the specter of a wage inflation increase later this year given the “significant uptick” in the wage and salary component of the Employment Cost Index during the first quarter.
She added that the weak payroll report in March was an “aberration” and that based on where the employment gap is (unemployment rate vs. full employment rate) the labor market is at an inflection point with wages set to accelerate to the upside.
On the other hand, Michelle Meyer at Bank of America Merrill Lynch said it “was another modestly disappointing report” while Standard Chartered economist Thomas Costerg told clients the “soft” April payroll report “sow doubt” that the economy hasn’t yet fully exited the headwinds that weighed on growth and job gains over the winter.
For now, stock bulls have a chance to make a run to fresh record highs as the Dow closes in on its early March peak of 18,300 — potentially breaking out of the trading range near 18,000 that it’s been stuck in since November.
Heading into next week, we’ll get another read on the job market with Tuesday’s job openings and labor turnover survey and whether the U.S. consumer is pulling its weight after winter spending slowdown with Wednesday’s retail sales report. Earnings season is winding down with Cisco Systems, Inc. (NASDAQ:CSCO) and J C Penney Company Inc (NYSE:JCP) reporting on Wednesday
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