Jobs Party: Gains Outpace Estimates But Inflationary Signs Lacking

Job growth spiked in May, rising a better than expected 223,000 while wage growth stayed in check. The result? A possible “Goldilocks” monthly jobs report that shows solid job growth continuing without much sign of potentially inflationary pay gains.

Dissecting the Jobs Report

As weather warmed last month, the construction sector appeared to come roaring back. Job growth in construction rose by 25,000 after a flat April. Other areas seeing big gains included 31,000 positions added in retail trades and 29,000 new health care positions. Manufacturing, professional and technical services and transportation and warehousing were also up.

Unemployment remains at very low levels, but wage growth of 2.7 percent year-over-year in May was generally in line with Wall Street’s expectations and didn’t show much sign of employers paying up for new talent. The number had been 2.6 percent in April. Some analysts had worried going into the report that a major wage jump—say to 3 percent on the year—might raise inflation flags and inspire concern about a more hawkish Fed. From a month-over-month basis, 0.3 percent wage growth was right where analysts had expected, so no surprises there.

The headline number of 223,000 came in well ahead of Wall Street analysts’ estimates for growth of about 190,000, and outpaced a revised 159,000 in April and 155,000 in March. Job gains are now averaging about 179,000 over the last three months, the government said, and the unemployment rate edged down to 3.8 percent from 3.9 percent a month earlier.

Eurozone Concerns Ebb, Global Trade Concerns Advance

Before the jobs report, stocks rebounded overnight in Europe amid signs of improved political stability in Italy. Bank stocks were among the leaders. That followed a washout in U.S. markets Thursday. Just about every sector lost ground and the market gave back a big chunk of Wednesday’s gains as trade fears stalked Wall Street.

Industrials took the brunt of it after the U.S. on Thursday announced new steel and aluminum tariffs vs. Europe, Mexico, and Canada. The international reaction wasn’t friendly and retaliation seems quite likely. Some of the multinational companies with major markets abroad could continue to feel the heat if trade relationships worsen between the U.S. and its key trading partners, and many of these companies are in the industrial sector. Boeing Co. BA and Caterpillar Inc. CAT were among stocks taking it on the chin Thursday.

No Comfort For Financials

Meanwhile, financials dropped about 0.8 percent and continued to lose some of the momentum built up over the last year. The sector is down more than 2 percent year-to-date, trailing the broader U.S. market, and some of the big bank stocks are at or near six-month lows. The pressure on banks Thursday appeared related at least partly to a Wall Street Journal report that the Fed has designated Deutsche Bank's U.S. business as being in "troubled condition.” European shares of that stock fell 7 percent, and the weakness appeared to infect other bank stocks as well. Common wisdom around the market says it’s hard to hold a big rally if the banks don’t show up, though history isn’t necessarily a guide.

Crude oil also took a dip lower Thursday and again early Friday, falling below $67 a barrel amid what appeared to be fears that if a trade war heats up, demand for oil could cool. The trade concerns also might have kept the benchmark 10-year Treasury yield and 30-year yields under pressure most of the day Thursday, though the 10-year yield bounced back to 2.9 percent early Friday. It’s possible that longer-term rates could be stuck in a range for a while, and trade pressures could start to influence the Fed’s thinking about rate strategy. Next month’s press conference from Fed Chair Jerome Powell looms large as investors await his views, though there’s no guarantee he’ll address international trade relations.

However, Fed Governor Lael Brainard said Thursday that "Global growth has been synchronized over the past year, but recent developments pose some risk. Political developments in Italy have reintroduced some risk, and financial conditions in the euro area have worsened somewhat in response.”

Geopolitics Help Steer the Ship

The market’s recent ups and downs on trade and European political news serve as a reminder that without earnings to keep things focused, geopolitics often tend to assert their power. That means investors could continue to face the possibility of increased volatility and more market movement based on whatever the political “noise” of the day might be. On Tuesday, investors fretted about Italian politics, and by Thursday the fear turned toward U.S. tariffs and possible retaliation. We’ll have to wait and see what Friday and next week might bring.

If it’s any consolation, we’ve seen this show before. The stock market took a hit earlier this year when the U.S. administration began to warn about tariff plans, but then came back. That’s not to say tariffs aren’t an important issue; they are. However, the coming Fed and European Central Bank (ECB) meetings followed by earnings season might start exerting a stronger sway on the market in coming weeks.

Another thing to remember is that the U.S. administration tends to make big announcements that often shock the market for a day or two, but then sometimes walks things back a bit. We saw that earlier this year with tariffs announced on China and then pulled back, followed by an announcement that North Korea talks had been canceled only to see the possibility raised again. If you’re a long-term investor, this sort of thing is worth keeping an eye on, but it shouldn’t be something that interferes with your strategy. As we noted last week, however, anyone with a lot of exposure to Europe might want to check their portfolio, in part because, as Brainard noted, the economy there has looked a bit weaker lately.

Figure 1: Leveling Off: The S&P Industrial sector (candlestick) enjoyed a nice rally earlier this month but leveled off over the last week as concerns about possible trade wars with Europe and China raised questions about the potential impact on U.S. multinationals. Still, industrials have fared better than financials (purple line) recently, which took another hit Thursday and haven’t gotten much traction all year. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Want a Bag For That?

With retail earnings season pretty much over, one key takeaway is how many so-called “brick-and-mortar” stores have found ways to keep customers coming in the doors rather than simply pointing and clicking. Many retailers had very good same-store sales, and what that shows is the traffic is still there for them. The challenge for retailers now is converting traffic to buyers, and retailers appear to have gotten much more creative and much better at helping their clients. About 70 percent of specialty retailers—which are smaller, niche-type stores—beat Wall Street’s forecasts for the quarter, according to Bloomberg research, and the S&P 500 Specialty Retail Index has actually outperformed the S&P 500 Internet Index since mid-March. Strong results reported by specialty retailers like Foot Locker, Inc. FL and Tiffany & Co. TIF last week have helped buttress the sector.

The Week Ahead

If you like earnings, next week might seem a bit disappointing. No really major names are on the calendar, though investors could get a taste of winter as summer begins when Vail Resorts, Inc. MTN puts out its results. From a data standpoint, there’s more to chew on. Factory orders and the ISM Non-Manufacturing Index both bow early in the week and potentially provide a behind the scenes look at how the wheels of the economy are turning. The ISM Index for April was the lowest since last December, though it still showed overall growth. Consider keeping an eye on the prices data point in that release to see if inflation pressure might be ticking up.

Holding the Line

Whenever markets have fallen over the last few months, one pattern has been pretty evident no matter what factor might have caused the drop: The S&P 500 Index (SPX) has managed to hold on to key support levels. For a long time earlier in the spring, the 200-day moving average appeared to be a support level that helped hold the SPX in check, analysts pointed out. Each time it tested levels below that, it popped back within a short time. Today, the 200-day moving average is well below current levels, and the technical level where the SPX has seemed to find support appears to be around 2700. It’s fallen below that as recently as earlier this week, but pulled itself back up. On Thursday, the SPX again tested that level but finished just above it. The question is whether that support continues to hold.

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