Russell 2000 leads markets higher, despite another strong jobs report

Smaller and more cyclical stocks in the Russell 2000 index led a buoyant stock market following passage of the debt ceiling bill, sending the measure to President Biden for his signature. Much stronger than expected payroll numbers failed to dampen enthusiasm. Small cap stocks led the rally, taking up leadership from tech stocks. Gold fell back and oil rallied.

TODAY’S MAJOR NEWS

Hot labor market

Non Farm Payroll (NFP) data was way better than expected, for the fourteenth month in a row, confirming other data that the economy and jobs market started to heat up again in April and May. The bottom line is that today’s numbers provide something for both the hawks and the doves on the Federal Open Market Committee of the Fed.

The higher unemployment rate, at 3.7%, is a move in the right direction regarding the Fed’s attempts to bring the number of job applicants in line with the number of job openings, but that number likely needs to fall between 5% and 6% to achieve the balance needed to bring overall inflation down to the 2% mandate. Average hourly earnings rose 4.3% year-on-year and the average workweek ticked lower to 34.3 hours in May, both moves in the direction desired by the Federal Reserve.

It’s also interesting to note that 5.5 million people want a job, but are unemployed and are not currently seeking or were unavailable to accept a job, unchanged from the previous month. The big abstention which became evident in Covid is still a factor.

Rate hikes expected in July after June pause

Fed fund futures are trading 70% odds of a 25-basis point rate hike after this morning's hot monthly jobs report, up from 54% yesterday. However, this reflects expectations that the rate hike won't come until the end of July, that it will be the last from the Fed, and that rate cuts will follow in November and December.

This market-driven view goes contrary to what members of the Federal Reserve have been telling us regarding rate cuts, but perception is reality to traders, and they see this as reason to celebrate an expected pivot by buying equities today. Additional enthusiasm comes from Congress putting the debt ceiling debate behind us until the end of 2024, even though our nation's rising debt will have serious consequences on interest obligations in the next budget and beyond.

Bottom line – risk-on

Financial markets moved aggressively to risk-on as the debt ceiling issue looks settled and despite the risk that rates could go higher.

TODAY’S MAJOR MARKETS

Equity markets

• The broadly-based Russell 2000 led markets this morning, up 3.0%, with the Nasdaq 100 and S&P 500 up 1.5% and 1.1% respectively
• The VIX index, Wall Street’s fear index, fell another 5% to 14.9, back to the low end of a 2-year range
• The FTSE 100 and DAX were up 1.6% and 1.3%, respectively

Currencies and Bonds

• The dollar index rose 0.5% against a basket of currencies, up to 104, with Sterling and Euro down 0.6% and 0.5% against the dollar
• Yields on 2-year and 10-year Treasury rose to 4.51% and 3.68% respectively

Commodities

• Gold prices fell back 1.3% to $1,969 per ounce
• Crude oil prices bounced back by 2.2%, to $71.7 per barrel
• The grain and oilseed sector was mostly higher

Hot jobs report (again)

• The economy created 339,00 jobs in May, according to this morning’s NFP report, well ahead of an expected 195,000. Notably, private payrolls grew by 283,000 in May, ahead of the expected 165,000
• Furthermore, April number was revised to 294,000 jobs created, up from the 253,00 originally reported
• Average hourly earnings rose as expected, by 0.3% month-on-month and 4.3% year-on-year
• The unemployment rate climbed to 3.7%, versus an expected 3.5%, even as the job participation rate remained unchanged at 62.6%

Ukraine grain deal wounded

• Russia reportedly informed the UN Joint Coordination Center it will continue to block registrations of ships at the Port of Pivdenny, largest of the three previously approved ports, until Ukraine allows the movement of ammonia through pipelines crossing its territory to export terminals
• Russian inspections of ships allowed to move to the other two ports total just two per day
• Just 33 ships left Ukrainian ports in May, half the April total, while just three left the Port of Pivdenny
• This comes at a time when Ukraine exports over land to Eastern Europe are also being challenged by resistance from the five border countries whose cash prices are suppressed by the cheaper supplies flowing west
• This is a long-term risk to the markets that is currently not a focus due to the large amount of cheap Russian wheat currently available on the world market, as well as the bumper Brazilian corn crop about to be harvested, with a negative effect on grain prices

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com