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The jobs report wasn’t strong enough to shake the conviction that the Fed will pause its rate hikes—and the stock is lovin’ it.
Win McNamee/Getty Images
One look at the incredibly strong headline number from the May jobs report and it appeared the stock market would be heading for a very bad day. Instead, the Dow Jones Industrial Average closed up more than 700 points because, beneath the surface, the release had something in it for everyone to like.
Start with the headline number. It was strong—and appeared to be too strong for a Federal Reserve that is trying to slow the U.S. economy. The Bureau of Labor Statistics’ latest employment report showed a gain of 339,000 nonfarm payrolls in May, compared with economists’ consensus estimate of 188,000. Prior months’ hiring was revised up by 93,000 jobs.
While the strength might not be what the Federal Reserve wants, it’s great news for investors because there continues to be no sign of a slowing economy—let alone a recession—in the labor market data. That means there’s no impending slowdown to hit corporate earnings and drag down stock prices, and it’s helping to send cyclical sectors higher: S&P 500 materials stocks closed up 3.4% on Friday, energy stocks gained 3%, and consumer discretionary stocks added 2.4%.
But here’s the strange thing: The robust numbers barely moved the odds of a Fed pause next week. That’s because the rest of the jobs report wasn’t nearly as strong as the headline.
The May report showed modest wage gains of 0.3% month over month and a tick up in the unemployment rate, signaling more availability of workers. The latter—which is derived from a different survey than the nonfarm payrolls figure—had been forecast to rise by a tenth of a percentage point, to 3.5%, but instead rose all the way to 3.7%.
That’s good news for the Fed. Officials have pointed to rising wages due to a lack of available workers as a key driver of inflation this year. Fed chairman Jerome Powell has emphasized that policy is “data dependent” from here. The May jobs report should be evidence of enough progress to keep the Fed from increasing interest rates at its next meeting on June 13 and 14.
“Today’s data are on balance strong, but not enough of a shocker to force the Fed’s hand in June,” writes Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. He expects the Federal Open Market Committee to pause in June, then revisit in July.
That helped growth stocks, whose valuations are more sensitive to changes in interest rates. The tech-heavy Nasdaq Composite index on Friday finished 1.1% higher—and even bond-proxy sectors including utilities and real estate rose.
The result is a broad rally, with approximately 90% of stocks in the
S&P 500
rising on Friday. The index as a whole added 1.5%, while the
Dow Jones Industrial Average
closed up 2.1%, and the small-cap
Russell 2000
jumped 3.6%.
There will be more information to parse by the time officials next meet, chiefly the May consumer price index, which is out on June 13. As far as Friday’s trading is concerned, the numbers could have hardly been better.
Write to Nicholas Jasinski at [email protected]
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