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Jul-11-2019 23:47printcomments

US Stocks Hit a Bump in the Road

Traders are now not as certain that the Fed will reduce rates when they meet in July.

stocks fall
Photo by energepic.com from Pexels

(SALEM, Ore.) - US stocks surged during the first week of July with the Dow and S&P 500 hitting fresh all-time highs. Stocks were buoyed as traders forecast that the Federal Reserve would decrease interest rates 2-times in 2019.

On Friday, July 5th, the day after the US Independence Day, a fly was added to the ointment. This came in the form of the US payroll report which showed that the number of jobs created in June was more than expected.

The government report was unexpected especially following the ADP private payroll report released earlier in the week which showed that private job creation had stalled. This led to a drop in the US stock market.

US Payrolls Were Stronger than Expected

US job growth unexpected rose more than expected according to the US Department of Labor. Non-farm payrolls increased by 224,000 jobs which was the best result since January.

This compared to expectations that payrolls would increase by 165,000 jobs. The May payroll report was revised slightly lower to 72,000 from 75,000. The unemployment rate edged up to 3.7% as labor force participation rose. Expectations had been for the unemployment rate to remain unchanged at 3.6%. As more people started looking for jobs, the rate moved higher.

The amount of money people are making is also on the rise, but missed expectations. The average hourly earnings number disappointed, rising 0.2% on a monthly basis against expectations for 0.3% growth. On a year over year basis, wages were up 3.1%, also a notch below market estimates of 3.2% and indicative that wage inflation remains subdued. The average work week was unchanged at 34.4 hours.

As the unemployment increased, so did a broader base of workers including discouraged workers as well as the underemployed which saw the rate nudge up to 7.2%, still around its lowest level since early 2001. The labor force participation rate increased one-tenth to 62.9%, its best since March.

The total labor force increased by 335,000 to just under 163 million while those counted as not in the labor force fell by 158,000 to 96.1 million.

Yields Surge Following the Report

US yields surged following the unexpected increase in the number of jobs that were created. The US ten-year benchmark treasury increased 10-basis points, surging above the psychological level of 2% which it tumbled below earlier in the week. The yield curve still remains inverted which points to a potential recession in the US.

The Likelihood of a Fed Cut is Reduced

What is clear is that traders are now not as certain that the Fed will reduce rates when they meet in July. The data has been mixed during the past few months. Earlier in July, the Institute of Supply Management reported a softer than expected ISM manufacturing and services report.

Inflation at the consumer level remains well below the Fed’s target of 2%. The housing market has also seen a boost recently as mortgage rates dipped to 2-year lows.

The unexpected increase in the jobs data reduced the likelihood of a Fed rate cut in July and pushed the number of rate cuts that are expected in 2019 down to 1-rate cut from 2-rate cuts.

Source Salem-News.com Special Features Dept.

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