Courtesy of Blain.
The theme of the week has been intraday action and today was positive despite the close. Indexes gapped down on quite bad news on the employment front but not as sharply as one would assume. After selling off through the 10 AM EST hour, buyers came in and by the close indexes were near sessions highs, even if negative. The S&P 500 fell 0.29% and the NASDAQ 0.58%.
Here is a breakdown of the employment report – keep in mind it is 1 report and subject to sharp revision and 35,000 people were temporarily unemployed based on the Verizon strike as we noted yesterday. That said we had a DROP in the unemployment rate as the labor force participation rate dropped yet again – i.e. when people drop out of the workforce entirely our government counts that as progress.
Job creation tumbled in May, with the economy adding just 38,000 positions, casting doubt on hopes for a stronger economic recovery as well as a Fed rate hike this summer. Jobs were skewed toward part time, which added 139,000 positions. Full time lost 59,000 jobs. Previous months’ reports also saw sharp downward revisions, with March sliding from 208,000 to 186,000 and April going from 160,000 to 123,000.
The Labor Department also reported Friday that the headline unemployment fell to 4.7%. That rate does not include those who did not actively look for employment during the month or the underemployed who were working part time for economic reasons. Wall Street was looking for payroll growth of 162,000 and the unemployment rate holding steady at 5.0%.
The drop in the unemployment rate was primarily due to a decline in the labor force participation rate, which fell to a 2016 low of 62.6%, a level near a four-decade low. The number of Americans not in the labor force surged to a record 94.7 million, an increase of 664,000.
“There’s one word for it, which is just shocking,” said Dan North, chief economist at Euler Hermes North America.
“It makes it a lot tougher for the Fed, clearly. It now puts them in an awkward position of having to justify higher rates into a slowing job market,” said David Lafferty, chief market strategist at Natixis Global Asset Management. “I don’t think history would look very favorably on that.”
ISM non manufacturing was also reported today and came in at 52.9 for May, well below April’s 55.7 print. The employment component fell to 49.7 from 53.0 in April. A reading above 50 still signals expansion.
Still holding our breakout levels on both indexes.
The NYSE McClellan Oscillator remains in green.
Banks (KRE) were hit, and utilities (XLU) rallied sharply as this was a reversal of a trade that had been going in the opposite direction with the assumption the Fed may indeed raise rates this summer.
Wall Street is pricing in a 6% probability of a Fed rate increase in June compared with a 21% chance on Thursday, according to the CME Group’s FedWatch tool.
“Positioning is still playing a big role. The positioning coming into the day was the economy’s strong and the Fed will hike … and today’s action is just an unwind of that,” said Ilya Feygin, managing director and senior strategist at WallachBeth Capital.
Gap (GPS) eported a 6% decline in comparable-store sales for the month of May at its Gap, Old Navy and Banana Republic stores. Analysts forecasted a 7.2% total decline. The stock went up. This is the new “good news” in brick & mortar retail I suppose!
Have a good weekend and we will see you back here Monday.
