Clearly, the June Employment report released on Friday was stronger than expected. As a result, given the positive payroll surprise, investors bid up US equities on Friday despite a very weak showing by markets broadly speaking and by the tech sector specifically on Thursday. Friday’s punch higher also manged to put a positive patina on a week that largely saw prices and investor conviction beginning to waver.
The top line employment gains for the month of +222k, versus consensus expectations that were calling for a more modest +170k, is important as it speaks to a re-acceleration in job creation. It also came just when many economic data points appeared to be suggesting that we may have been heading into a quarter end economic slowdown.
The improvement in June’s employment data versus May’s un-revised reading of +138k spoke to that, in effect reassuring investors that our expansion remains in channel. As if to underscore that theme – the previous two months were also revised higher by a total of 47k. Those revisions for April and May in conjunction with June’s numbers put to rest any concern of a slowdown in our expansion for the time being.
The official unemployment rate did tick higher from 4.3% to 4.4% but that was driven largely by the fact that the long term unemployed are increasingly attempting to re-enter the work force – another positive.
Within the report itself, there were additional indications that our employment landscape continues to improve. Much of that improvement has been and remains tied to the service sector which added a solid 35k positions in the period. Service sector jobs tend to be of a professional nature and as a result are considered higher quality adds. The temporary positions vertical, which is often looked as a forward looking indicator for growth added a solid 13k in the month. Even the beaten up retail sector added positions in the month (+8k). Government jobs unexpectedly expanded by 35k – the most in 2017. Construction (+16k), mining (+8k) and even manufacturing (+1k) were all positive for the month.
If there is a weakness in the June Employment Report, it can be argued that it resides in average hourly earnings data which rose by a scant 0.1%. However, on a year-over-year basis, average hourly earnings have registered a sustainable and healthy gain of 2.6%. Additionally the labor force participation rate remained at 62.7. Though unchanged, it does appear to have finally leveled off in 2017. Certainly a constructive theme.
All in, the top line gains of 222k posted in June’s Employment Report were merely the tip of a very constructive release – one that will likely keep the Fed in channel to raise once more in 2017 as the broader economy continues to gain traction in the second half.
That said, I continue to expect to see more weakness in the large cap tech and software verticals in coming days and weeks. That weakness will continue to weigh on the over-all market making meaningful gains from these levels a bit more challenging. Q2 earnings season, which begins this week may provide for a counter argument. Financials will be in that driver seat this week.
This week’s economic calendar is relatively light from a data point of view but the little we do get is very important. On Monday, investors will focus on the Labor Market Conditions Index for June, which is expected to come in at 1.8. That would be down a few ticks from May’s reading of 3.5 but would still be considered solid given the overall employment landscape. Tuesday’s release of the NFIB Small Business Optimism Index is expected to remain solidly positive at 104.5 – matching May’s results. On Wednesday, the Atlanta Fed Business Inflation Expectations for July are expected to remain tightly tethered to June’s 2.0%. Also on Wednesday, we receive the EIA Petroleum Status Report. Keep in mind that last week’s report for the previous week, reflected a draw down across all three verticals. That move did provide a degree of lift to crude. On Thursday, Weekly Jobless Claims, PPI-FD and the Bloomberg Consumer Comfort Index will all be released. Friday, investors will focus on the CPI, to be released at 8:30 AM as well as Retail Sales, Industrial Production, Business inventories, Consumer Sentiment and the rig count.
Away from the data on tap this week it is notable that Chair Yellen will be testifying on Capitol Hill and giving two additional speeches. John Williams, Lael Brainard, Neel Kashkari, Esther George and Robert Kaplan will also be giving talks.