A strong rally Friday following the release of the July payrolls report pushed stocks higher for the week. The gains helped the Nasdaq join the Dow, the S&P 500 and the S&P MidCap 400 in record territory – the small-cap Russell 2000 touched a new high for 2016 but remained below its mid-2015 peak.
Last week started off quiet and down. Weak Chinese manufacturing data and the mixed results of European bank stress tests weighed on markets, while quarterly earnings reports moved to the background as their flow subsided. Oil prices fell below $40 a barrel and into bear market territory – off more than 20 percent from recent highs – weighing on energy stocks and overall sentiment. A rebound in oil prices on Wednesday helped stocks recover some of their momentum.
On Friday the Labor Department announced that employers had added 255,000 jobs in the month of July, well above expectations, while also revising previous months’ gains higher and the unemployment rate held at 4.9 percent. The job gains reversed the weakness of April and May, which had caused some to doubt the durability of the recovery. The overall trend in job growth has slowed since 2014, but jobless claims and layoff announcements remain near the lows of the expansion that began seven years ago.
Domestic growth has often been much slower than we’d like, but we’re now talking about an expansion in payroll growth of 70 consecutive months, the longest in U.S. history. Moreover, we are seeing a record high employment to population ratio among people age 65 and older and it is taking 29 days to fill a vacant job today, on average, up from 23 days in 2006. In 2009 there were six unemployed workers per job opening; it’s 1.3 today.
The July job gains were accompanied by a strong increase in labor income, which bodes well for consumer spending. Reduced slack in the labor market should put upward pressure on inflation, bringing it closer to the Federal Reserve’s 2 percent target. Most Fed-watchers are back to expecting a rate hike by year-end.
U.S. Treasury yields rose and prices fell on Friday morning on the employment report, but yields remained below their recent peak in mid-July. Municipal bonds produced marginally negative returns for the week. Strong demand helped the investment-grade corporate bond market cope with a significant increase in new issuance. The energy sector outperformed due to the move higher in crude later in the week. Meanwhile, global equity weakness weighed somewhat on the high yield asset class for much of the week, although lower-rated bonds held up better than their higher-quality counterparts.
European stocks ended last week slightly lower, despite a late-week lift following the announcement of a big stimulus package by the Bank of England and the strong jobs numbers coming out of the U.S. The pan-European benchmark Euro Stoxx 600 and Germany’s DAX were both dragged lower early last week, partly due to lackluster earnings reports and weaker economic sentiment.
Despite the announcement of a new stimulus package in Japan, the Nikkei declined 1.9 percent last week. For the year to date, the Nikkei 225 is down nearly 15 percent, the large-cap TOPIX 100 is off almost 18 percent, and the TOPIX Small Index, which fell more steeply last week, is roughly 15 percent lower. The yen strengthened and closed near ¥101 per U.S. dollar on Friday. For the year to date, the yen has gained about 16 percent versus the dollar.
The research arm of China’s top economic planning agency called for a cut in interest rates and the reserve requirement ratio for banks in a rare public airing on monetary policy last week and the release of weak manufacturing data. China’s National Development and Reform Commission, which is in charge of steering state investment and other parts of the country’s planned economy, said in a statement on its website that China needed “to find the appropriate time to further cut interest rates and bank reserve requirement ratios.”