July 8, 2016

Stocks surged after a better than expected labor market report. The Dow and SPX are trading up 186 pts & 1.2%, respectively. In fact, the SPX is now back within .6% of its all-time high. The Nasdaq is up 1.3% this morning. All ten major market sectors are higher in early trading, led by financials, industrials and consumer discretionary. Utilities are flat. WTI crude oil is trading back up to $45.50/barrel and gold is down for the first time in a while. Bonds are down slightly, with yields moving higher. The 5- and 10-year Treasury yields are up to .99% and 1.39%, respectively. 

The Employment Situation Report was a shocker, just like last month. The US economy created 287,000 new jobs during the month of June, far in excess of what economists projected. This is the strongest month for a job creation so far in 2016. There were substantial revisions for prior months; the May job tally was downwardly revised to just 11,000 jobs from the initial estimate of 38,000. So June represents a strong snap-back from a very dismal May. The unemployment rate increased a bit to 4.9% as more people entered the work force. Meanwhile, the under-employment rate (U-6) fell to 9.6%, its lowest level since the spring of 2008. And here’s the biggest piece of news within the report: average hourly earnings rose 2.6% year-over-year in June. That’s the second-highest rate in seven years. Wage growth in clearly picking up, with two implications. First, consumer spending will get a boost; second, rising inflation will present a problem for the Fed, which is reticent to raise interest rates in light of global financial fragility. 

I should note some distortions that made the May & June jobs reports so night-and-day different. Both months were distorted by the worker strike at Verizon Communications (VZ). I’ve heard this impact quantified at anywhere between 30,000 and 70,000. In addition, apparently June saw a big bump in seasonal jobs in hospitality & leisure. CNBC says that was good for 60,000 jobs last month. And some economists believe improving weather contributed to jobs gains in June. 

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