Keep On Rolling: Jobs Growth Solid In June, But Can Report Outweigh Trade Battle?

The U.S. jobs machine kept chugging along in June, adding a better-than-expected 213,000 new positions. Still, the market looked like it might struggle for gains Friday after economic sanctions went into effect overnight between the U.S. and China.

Looking at the payrolls data, there appeared to be a lot to like. Many of the new jobs were in segments like manufacturing and construction that often provide long-term careers, not simply jobs. At the same time, wage growth stayed in the sweet spot, growing 2.7% year-over-year. That was the same as a month ago, and could show an economy where workers are getting decent raises but not at levels that might suggest inflationary pressure. Hourly wage growth rose 0.2% on a month-to-month basis, a touch below Wall Street analysts’ expectations for 0.3%.

In addition, the Labor Department said it had underestimated jobs growth in April and May, adding a total of 37,000 new positions to those two months. The only blemish on the report was a slight uptick in the unemployment rate to 4% from 3.8% in May. That could reflect more people getting back into the job hunt as the economy improves, however.

Lots of the new jobs seemed to be in areas with long-term potential, including 50,000 new positions in business and professional services and 36,000 new positions in manufacturing, the Labor Department said. Health care positions rose 25,000 and construction jobs grew by 13,000. A loss of 22,000 retail jobs stood out as one question mark in the report, but that was about the same number of jobs the sector gained in May so maybe things are just evening out.

The 213,000 jobs created in June compared with a revised 244,000 in May and Wall Street analysts’ expectations for about 195,000. Overall, the report showed no signs of a slowing economy. Instead, the report might back some economists' expectations for solid gross domestic product (GDP) growth in Q2, where estimates stand at around 4% after a rather disappointing 2% GDP figure for Q1. The question now is whether the trade war that officially began today (more below) might start to weigh on growth moving forward, but that remains to be seen.

Rally Finds Staying Power

The rally that couldn’t hang on Tuesday made a re-appearance Thursday and managed to hold gains through the close. News reports about a possible thaw in trade relations between the U.S. and both China and Europe might have provided some initial lift, but that belies the fact that U.S. tariffs went into effect today on $34 billion in Chinese goods and retaliatory Chinese tariffs on $34 billion in U.S. goods also began (see more below).

Some of the companies that took a hit on Tuesday, including Caterpillar CAT and Apple AAPL, recovered a bit Thursday as trade concerns ebbed slightly. Automakers, another sector under pressure from trade tensions, clawed back as well amid talk that the U.S. and Europe might be able to resolve their battle over car tariffs. However, some of those same names saw their shares decline in futures trading ahead of Friday’s opening bell as the tariffs went into effect.

Gains Thursday came pretty much across the board, but the best performing sectors included tech, staples, and health care. What’s also interesting is that the Treasury market barely moved, with 10-year yields ending Thursday near 2.83%. That’s right where they started the day before stocks rallied, so it might point to continued caution in parts of the investing community even as some investors appear to embrace a bit more risk.

Fed Weighs In

Before the payrolls report, Thursday’s Fed minutes took center stage. Fed officials expressed worry that uncertainty over tariffs could have “negative effects on business sentiment and investment spending.” 

The minutes also showed the Fed expecting better economic growth in Q2 than in Q1 and projecting consumer price inflation to run a little higher in the second half of the year due to energy price gains. However, the Fed still projects inflation to stay near its 2% target over the medium term and unemployment to remain low. The Fed also said it expects further “gradual” increases in the Fed funds rate, and judged that rates could reach a “neutral” level “sometime next year.” Risks to the economy remain “balanced,” the Fed said.

The minutes pointed to reports from several Fed Districts of companies having trouble finding qualified workers and having to raise pay to attract and retain employees. This sort of language could feed into fears of inflation, but the minutes as a whole didn’t really shout any alarms and said that on the balance, wage growth remains “moderate.” The trade language, along with a paragraph in which the Fed pondered the possibility of weakness in Europe and emerging markets potentially posing downside risk, were some of the key warnings. The Fed also warned that if inflation gets too hot, the economy could experience a downturn. While that might sound elementary, it could provide a clue into what’s keeping Fed decision makers up at night.

Over the last three months, the 200-day moving average (blue line) for the S&P 500 Index (SPX) has appeared to function as a psychological support level. Though the SPX has tested the 200-day moving average recently, it hasn’t gone below it since early May. 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. 

Tariff Day is Here:

Starting just after midnight today, U.S. tariffs on $34 billion in Chinese goods took effect, the first salvo in a trade fight with China that also includes Chinese tariffs on $34 billion in U.S. goods. U.S. industries that could suffer include agriculture, heavy equipment makers, semiconductor makers, automakers, and many others. By value, soybeans are the top item targeted by Beijing’s proposed tariffs; China imported around $14 billion in U.S. soybeans last year, The Wall Street Journal reported. In all, China’s tariffs would cover 545 categories of U.S. products, while the U.S. tariffs would cover 818 categories of products from China. 

Trade Battle Starting to Have Impact:

Businesses may already be feeling the pinch from the tariffs, judging by anecdotal reports in the media. A Chinese steakhouse stopped buying U.S. beef, the WSJ reported, while a U.S. chemical company struggled to get a shipment into China just ahead of the deadline. China has begun focusing its soybean purchases on Brazilian product. In addition, many U.S. companies with supply chains that run through China could suffer consequences, including medical device makers. 

Though there’s no way to directly measure the direct market impact of all these competing factors, the fact is, the S&P 500 (SPX) remains well below its January peak and trade is considered one of the major reasons. Even a hint of a recovery in trade relations has the potential to give the market a lift, as we may have seen in Thursday’s U.S. Wall Street rally amid rumors of cooling trade tensions with Europe. On the other hand, if the U.S. moves ahead with its threat to impose tariffs on hundreds of billions of dollars in additional Chinese products, it might be hard for the market to get much traction. The question is whether those additional tariffs remain a threat or become reality.

Support Group:

Perhaps you noticed that the S&P 500 (SPX) once again bounced back after a brief dip below the 2,700 mark recently. That level, 2,700, has been a psychological support area for the SPX over the last couple of months, and sits a bit above another support level at the 200-day moving average of 2,672 (going into Thursday’s trading session). Looking back, the 200-day has served as a really strong foundation for the SPX over the last three months or so, with the SPX dropping below it on a couple of trading days in April and May but bouncing back quickly — during the same day on one occasion in early May. If you’re a long-term investor, these sort of technical talking points might seem sleep-inducing, but they are worth watching because at this point they seem to tell a positive story for the market’s overall direction.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.