Not too hot, not too cold…just right. That was the reaction among traders and economists after the release of the May jobs report. The Labor Department said the US economy created 175,000 jobs and the unemployment rate edged up to 7.6 percent. Investors were more hyper-focused on this report than usual, because volatility in global bond and stock markets has spiked in recent weeks. The up and down gyrations were caused by the single most important question of the moment: when will the Federal Reserve pull back on its stimulus programs?
For some time, analysts thought the central bank would not start reducing the amount of bonds it was buying until 2014. Then, during his May 22nd testimony on Capitol Hill, Chairman Ben Bernanke dropped a bombshell, after being asked whether the Fed might reduce bond purchases before Labor Day. Bernanke said that the Fed could change course “in the next few [FOMC] meetings,” depending on prevailing economic data. Many investors interpreted the comment as a hint that the Fed’s bond buying was coming to an end; and just like that, the highs for stocks and bonds were in and the action tilted towards the downside.
Since May 22nd, every economic report was viewed as proof that the Fed would taper/not taper. The momentum built up coming into jobs report Friday, when one trader told me “This is THE MOST IMPORTANT JOBS REPORT OF THE PAST 3 YEARS!” OK, maybe that was an overstatement, but there really was a lot of emotional energy spent on this one, perhaps for naught. For all of the consternation, there was a Goldilocks result: not too strong of a report, which may have indicated that the Fed would change its monetary policy sooner rather than later and not too weak to indicate a spring economic swoon.
What did the jobs report tell us? The numbers are consistent with an economy that’s growing, but not at a fast enough pace to generate widespread hiring for the 11.8 million Americans that are out of work. There were good signs even in the seemingly bad news: the unemployment rate increased due to a rise in the workforce.
Of course one report will not put an end to the Fed-watching (navel gazing), but it looks more likely that the central bank will likely wait until the September meeting to discuss a reduction in the $85 billion per month of bond purchases. For now, the taper-talk has receded…you can return to your regularly scheduled programming.
Markets: The jobs report bounce put all three US stock indexes in positive territory for the week.
- DJIA: 15,248, up 0.9% on week, up 16.4% on year
- S&P 500: 1643, up 0.8% on week, up 15.2% on year
- NASDAQ: 3469, up 0.4% on week, up 14.9% on year
- July Crude Oil: $96.03
- August Gold: $1383
- AAA Nat'l average price for gallon of regular Gas: $3.63
THE WEEK AHEAD: It should be a quieter week on the economic calendar. The highlights include retail sales, which are expected to have increased in May and the Producer Price Index, which is likely to show tame inflation at the wholesale level.
Bank of Japan expected to maintain rates; may extend the term of its low-interest fund provision
7:30 Small Business Optimism Index
8:30 Weekly Claims
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
8:30 Producer Price Index
9:15 Industrial Production
9:55 Consumer Sentiment