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Stocks finished the day lower but ultimately little-changed after the May jobs report was a major disappointment.
First, the scoreboard:
Dow: 17,807.1, -31.5, (-0.2%) S&P 500: 2,099.1, -6.1, (-0.3%) Nasdaq: 4,942.5, -28.9, (-0.6%) WTI crude oil: $48.80, -0.7% 10-year Treasury: 1.7%
The US economy added just 38,000 jobs in May, the fewest for any month since September 2010 when the economy actually lost jobs. Even though this was a poor report, May marked the 68th straight month of job gains in the US.
The unemployment rate fell to 4.7% in May, a new post-recession low, and wages grew 2.5% over the prior year in May which matched a post-recession best seen earlier this year. May’s report was also negatively impacted by a 34,000-worker strike by Verizon employees, but even adding these jobs back to the headline number May’s report still would’ve been a massive disappointment as Wall Street economists were expecting job gains of 160,000.
Following Friday’s report, markets completely priced out any chance of a rate hike from the Federal Reserve at its June 14-15 meeting with chances for a move in July also getting severely cut.
Fed Chair Janet Yellen, we’d note, is set to speak on Monday as well as following the June 15 announcement. Yellen will also speak before the Senate on June 21. And so while many had taken recent Fed communications as a sign that rate hikes were coming sooner rather than later, poor incoming data pushed expectations out.
“And thus died the June rate hike,” Pantheon Macroeconomics’ Ian Shepherdson wrote in a note following the report. BNP Paribas economists also said Friday that the data supported their view for the Fed to keep rates on hold until at least 2018.
Elsewhere in economic data on Friday, the latest readings on service sector activity from both Markit Economics and the Institute for Supply Management were disappointments.
Markit’s final reading on service sector activity in May hit 51.3, just below expectations for 51.4 and, while still indicating expansion, the softest reading since the recession.
Markit’s chief economist Chris Williamson said, “With optimism about the business outlook dropping to a new post-crisis low, companies are expecting conditions to remain challenging in coming months, citing uncertainty about the presidential election as well as broader worries about weak demand at home and abroad.”
ISM’s report was also a miss with this reading on activity falling to 52.9 from 55.7 last month. So, again, indicating expansion in the sector responsible for about 80% of GDP, but at a slower rate than expected.
In a note following ISM’s report, Ian Shepherdson at Pantheon Macro said the report was, “surprisingly grim,” adding that, “This is disappointing, and hard to square with the much better retail sales numbers for April, which tend to drive the index.”
The April report on factory orders also crossed Friday morning, showing orders rose 1.9%, in-line with expectations.
And so overall, Friday was a day that showed the US economy appears to have lost momentum in the beginning of the second quarter.
Recall that in the first quarter of the year the economy grew at a pace of just 0.8% and in each of the last two years we’ve seen just a modest 2.4% expansion in GDP. But inside of a framework in which the economy isn’t that good but isn’t that bad, periods of relatively weakness are to be expected.
This is not, in short, an “up and to the right” kind of economy right now.