The May jobs report did not collapse as some had feared tariff uncertainty would cause layoffs. The economy is in a steady state but there remains uncertainty over trade, federal deficits, inflation, interest rates, etc.
Here are the highlights of the employment report for May: Payrolls added 139,000 jobs, surpassing the Dow Jones estimate of 125,000 but falling short of April’s revised 147,000. The unemployment rate held steady at 4.2%, in line with expectations, while average hourly earnings rose 0.4% month-over-month to $36.24, pushing annual wage growth to 3.9%, above the forecasted 3.7%. Despite the solid headline figures, downward revisions trimmed 95,000 jobs from March and April estimates, signaling potential labor market cooling amid tariff uncertainties.
So, good news but with negative revisions sprinkled in with a bunch of uncertainty on the outlook.
How are stocks doing?
The S&P 500 index had another good week climbing 1.5% and above 6,000 for the first time since February 21st with notable strength in technology stocks. As you can see in the chart below, the S&P consolidated over the last four weeks (each bar is one week) and Friday’s positive reaction looks to be the start of another push higher. The technical indicators at the bottom of the chart (MACD & RSI) look positive so we may see new all-time highs re-tested later this month.
Also, sentiment seems negative but this perception can fuel stocks higher as investors see better days (and prices) down the road. You have to watch out when everyone feels that you can’t lose.
The Yield Curve
Interest rates remain in the spotlight as they reflect inflation, growth, trade and fiscal policy of any country. As you can see, many points of the curve below are at 3-month highs. We had a flight to quality in April as stocks plunged and now we are seeing a rebound higher with the 30Yr hitting 5% in mid-May.
In a good economy, we should see a step curve with rising interest rates. This is ideal for financial institutions which are spread lenders and benefit as long rates rise above depository rates they pay their customers. The opposite of this is true when the curve is inverted or flat which has been the case for most of the post financial crisis era. So, even though interest rates are climbing this could be a silver lining if inflation and fiscal deficits can be contained.
If the labor markets hold on as Washington works through budget and trade deals then we may get through this era with minimal damage to the equity markets. You may not like the outlook for higher rates if you are looking to take out a mortgage but this is part of the pain in the aftermath of too many years of ultra low interest rates.
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Paul J McCarthy III CFA
President, Kisco Capital
