Blog Post

Unexpected May Jobs Report Drives the Markets

The week began with concerns over violence associated with the nationwide protests over police brutality and China threatening not to buy its promised purchases of agricultural products over U.S. sanctions over the Hong Kong crackdown.  On Wednesday, cities started to see relative calm, following Minnesota’s decision to upgrade the officer’s murder charge and also to charge the other officers present with aiding and abetting murder.

Since the virus outbreak China had banned foreign airlines from landing.  On Wednesday, the Trump administration threatened to bar Chinese airlines from the U.S. and on Thursday, China relented by allowing U.S. and other foreign airlines to service some but not all China routes.

Also on Wednesday, Saudi Arabia and Russia agreed to extend the coronavirus production cuts set to expire in June through the end of July.  The agreement could breakdown unless countries that have been overproducing, particularly Iraq and Nigeria, agree to make up for their lack of compliance with the current cuts.

On Thursday, the European Central Bank increased its bond-purchase program to $1.5TN. 

The Senate plans to hold hearings next week on additional relief/stimulus spending.  Plans being considered are either topping off wages as people return to work or extending, but gradually reducing, the $600 extra unemployment benefits beyond the July expiration.

On Friday an unexpected increase in jobs for the month of May drove the markets higher.  The increase of 2.5MM jobs created in May was a record in data going back to 1948.  Also setting a record was the miss by economists forecasting the job number as the median projection was for a loss of 7.5MM jobs.  Unemployment fell from 14.7% to 13.3% versus a forecast to increase to just under 20%.  The miss in forecasts was likely due to the unprecedented situation in the economy today, making it hard to model.  The payroll protection loans and other stimulus are unprecedented.

With the sharp Friday rally stocks ended the week sharply higher

Treasury yields rose sharply as the 30-year bond rose to 1.656% but the 10-Year note rose to 0.888%.  Crude oil rose sharply to $39.26 and natural gas fell to $1.80 per MMBTUs.  The U.S. dollar fell against a basket of currencies and gold prices rose to $1686.60 an ounce.

In the economic numbers this week:

  • IHS Markit released May’s purchasing managers indexes.  Keep in mind that anything above 50 represents expansion and anything below 50 represents contraction.  Most of the world is still in contraction but in most parts of the world the rate of contraction is decreasing.
    • China manufacturing rose from 49.4 (slight decline) in April to 50.7 (slight expansion) in May as China continues to stabilize after its sharp February decline.  Exports and order backlogs have fallen and Chinese companies continue to trim staff.
    • China services rose from 44.4 in April to 55.0 in May.
    • U.S. Manufacturing rose from 36.1 in April to 39.8 in May, contracting at a slower rate.
    • U.S. Services rose from 26.7 in April to 37.5 in May.
    • Mexico manufacturing rose from 35.0 in April to 38.3 in May.
    • Eurozone manufacturing rose from 33.4 in April to 39.4 in May.
    • Eurozone composite (manufacturing and services) rose from 13.6 in April to 31.9 in May.
    • Japan manufacturing fell from 41.9 in April to 38.4 in May.
    • Japan services rose from 21.5 in April to 26.5 in May.
  • Eurozone unemployment rose from 7.1% in March to 7.3% in April.
  • The Commerce Department reported the U.S. Trade deficit widened 16.7% in April.  Both imports and exports fell.
  • The Labor Department reported:
    • 1.9MM workers filed initial unemployment claims last week. 
    • For the month of May, however, the U.S. added 2.5MM jobs as many returned to work.  So, while many were laid off, more returned to work.  Still this gain follows losses of 22.1MM jobs combined in March and April.
    • The unemployment rate fell from 14.7% in April to 13.3% in May.
  • The EIA weekly oil report is here wpsrsummary (5).  Also, the EIA reported in the past week:
    • Field production of crude oil dropped from 11.4MM barrels to 11.2MM barrels per day.  The peak production at the end of February was 13.1MM barrels per day.
    • Natural gas storage rose by 102BN cubic feet and is above the five year average at this time of year.
  • Baker Hughes reported the number of active oil rigs fell 16 to 206 and the number of active natural gas fell 1 to 76.

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Best Regards,

Loren C. Rex, CFP®, AIF®, MA                                                   Erik A Smith AIF®

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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.  The Indices mentioned are unmanaged and cannot be invested into directly.


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