The Week In Review


Apparently, a trade war started on Friday -- or so it was said -- yet the stock market acted as if there was a daisy stuck in the barrel of every trade threat.  For the second day in a row, the stock market ignored the trade conflict between the U.S. and China (and other countries for that matter) and rallied around a pleasing employment report for June.

It was clear to see in the futures market this morning how the employment report was the inflection point for a shift in trading sentiment.  Prior to its release at 8:30 a.m. ET, the S&P futures were down as many as seven points and signalling a modestly lower start for the broader market. 

Following the release, they turned positive, and although the open to today's session was a bit tentative, the bulls soon took command of today's tape, ceding some ground only in a profit-taking retreat in the last 30 minutes of trading.

The catalyst for the upside bias was the recognition that the June employment report had a familiar Goldilocks hue to it.  Specifically, it featured solid nonfarm payrolls growth (+213,000) and a subdued 2.7% year-over-year gain in average hourly earnings that kept inflation worries, and aggressive rate-hike worries, at bay.

The stock market wasn't the only beneficiary of that fairy-tale theme.  The Treasury market also enjoyed the not-too-hot-not-too-cold narrative.

The 2-yr note yield, which is more sensitive to changes in the fed funds rate, fell three basis points to 2.53% while the 10-yr note yield, which is more sensitive to inflation, slipped one basis point to 2.83%.

Within the stock market, every sector was a winner. 

Gains ranged from 0.3% (consumer staples) to 1.4% (health care).  The latter was helped by a huge gain in Biogen (BIIB 357.48, +58.67, +19.6%), which surged after announcing encouraging, and surprising, Phase II trial results for its Alzheimer's drug.

A 1.2% increase in the information technology sector, which flowed from the outperformance of Apple (AAPL 187.97, +2.57, +1.4%), Facebook (FB 203.23, +4.78, +2.4%), Alphabet (GOOG 1140.17, +15.90, +1.4%), and Microsoft (MSFT 101.16, +1.40, +1.4%), solidified the upside bias and drove the outperformance of the Nasdaq Composite (+1.3%).

Trade matters were talked about widely.  The U.S. and China both pressed ahead with tariffs on $34 billion worth of imported goods from each country, which was not a surprise, and President Trump suggested it's possible tariffs on more than $500 billion of Chinese goods could be levied over time if necessary.

The latter was a surprise, but judging by the stock market's performance, it was not unnerved by the remark.

Taking a closer look at today's economic data:

  • June nonfarm payrolls increased by 213,000 ( consensus 195,000). Over the past three months, job gains have averaged 211,000 per month.
  • June private sector payrolls increased by 202,000 ( consensus 192,000).
  • June unemployment rate was 4.0% ( consensus 3.8%) versus 3.8% in May
  • June average hourly earnings were up 0.2% ( consensus +0.3%), after increasing 0.3% in May. Over the last 12 months, average hourly earnings have risen 2.7%, versus 2.7% for the 12 months ending in May.
  • The average workweek in June was 34.5 hours ( consensus 34.5) versus 34.5 hours in May June manufacturing workweek increased 0.1 hours to 40.9 hours Factory overtime increased 0.1 hours to 3.5 hours
  • The labor force participation rate was 62.9% in June, versus 62.7% in May
    • The key takeaway is that the data in aggregate were strong enough to excite the masses about the economic expansion continuing, but not so strong as to ignite any mass hysteria about inflation taking off and the Federal Reserve needing to clamp down fast and hard to contain it.
  • The trade deficit narrowed to $43.1 billion in May ( consensus -$43.6 billion) from $46.1 billion in April, with exports increasing $4.1 billion more than April exports and imports increasing $1.1 billion more than April imports.
    • The key takeaway from the report is that net exports will be accounted for a positive component in Q2 GDP forecasts, as the second quarter average real trade deficit is 7.4% less than the first quarter average.

Monday's economic calendar will feature the Consumer Credit report ( consensus $12.4 billion) for May.

  • Nasdaq Composite +11.4% YTD
  • Russell 2000 +10.3% YTD
  • S&P 500 +3.2% YTD
  • Dow Jones Industrial Average -1.1% YTD

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