June 6, 2016

The major stock market averages are sharply higher in early trading (Dow +114 pts; SPX +.5%). Gains are widespread, with biotechs, materials, banks and energy names leading the way. Despite weak factory orders in Germany, European stock markets are poised to close higher this morning. Commodities are broadly higher, with WTI crude oil rebounding to nearly $50/barrel. The industrial metals are also coming back, with iron ore up over 3% and copper up about .7%. Bonds are selling off a bit after surging on Friday. The 5- and 10-year Treasury yields ticked up to 1.26% and 1.73%, respectively. 

Janus bond fund manager Bill Gross addressed the implications of low-to-negative interest rates over the long term in a CNBC interview Friday. For the foreseeable future, he expects fixed income returns to remain muted and equities will outperform. He sees the 10-year Treasury yield remaining around 1.8% and equity market returns to be around 4-5% per year. So he wondered aloud how one can run a pension fund promising retirees 3-4% returns when the bond market is going to give you 1-2%. “Slowly…at the margin they’re going bankrupt.” And then he took it a step further. If household savers “can’t earn more than zero at their bank, how can they pay for education and how can they pay for retirement?”

To say Wall Street was surprised by Friday’s Employment Situation Report is an understatement. Economist and CNBC Contributor Larry Kudlow said he now believes we are in a “mild business recession,” although not a full-fledged recession. So that’s a term we haven’t heard before. On the other hand, Goldman Sachs Chief Economist Jan Hatzius says he believes the May payroll number was an “outlier.” In other words, it does not demonstrate a change for the worse for the jobs market or the economy. He notes the report isn’t consistent with the “vast majority of indicators we’re getting.” David Kelly at JP Morgan says “we’re pretty close to full employment,” so we should expect the volume of hiring to moderate anyway. Both economists agree that one month’s data doesn’t make a trend, but they think the May jobs report will keep the Fed from raising rates soon. Finally, CNBC contributor Jim Cramer openly questioned the quality of data collected for the Employment Situation Report. He said huge [investment] decisions are made based on these numbers, and yet the government doesn’t seem capable of adequately tracking tens of thousands of jobs. He called it “stupid and embarrassing” to have such “knuckle-headed data.” 

Federal Reserve Bank of Atlanta President Dennis Lockhart said in a Bloomberg interview that the Federal Reserve should wait until July to consider any near-term interest rate hikes. This is obviously a nod to the very weak jobs report. He also mentioned uncertainty surrounding the upcoming British vote on European Union membership. He believes the Fed should be “patient” and “watchful.” 

Bloomberg reports economists are taking down their 2016 gross domestic product (GDP) estimates. GDP is of course a measure of economic growth. The average forecast according to Bloomberg’s survey, is for a mere 1.8% growth. About 57% of respondents said the election was one reason why they’ve recently reduced growth estimates.  


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