U.S. stock market indexes rallied on Friday and closed just below all-time highs following the release of the June non-farm payroll jobs report that surpassed market expectations and calmed fears about the health of the U.S. labor market.
The Dow Jones increased 250.86 points (1.40 percent) and the Nasdaq rose 79.95 points (1.64 percent) following the jobs report from the Bureau of Labor Statistics that showed total non-farm employment increased by 287,000 in June, beating the consensus estimate of 175,00 from briefing.com and far outpacing May’s disastrous 11,000 revised non-farm job report.
Even with June’s better than expected non-farm employment report which served to push the market higher, U.S. job gains over the past 3 months have been modest with an average of 147,000 per month and well below the 200,000 + job increases found at the beginning of 2016 and across several months in 2015.
Over the year, hourly earnings have risen by 2.6 percent, a good indicator that wages are rising even with more modest job gains over the past 3 months.
Average hourly earnings rose by .02 cents in June to $25.61 after increasing .06 cents in May.
10 Year Treasury Yield Continues To Slide
The U.S. 10 year Treasury, which is a safe asset during volatile periods, saw its yield settle at 1.366 percent on Friday, a new record low, after briefly tumbling to 1.321 percent during intraday trading on Wednesday.
Treasury yields fall when Treasury prices move higher.
Due to lingering uncertainty about the financial fallout from the June 23rd Brexit vote in the EU, along with unease about Italy’s banking sector, and negative treasury yields in Germany (-0.19) and Japan (-0.29), investors have turned to the U.S. 10 year Treasury for better cover and a stronger return on their money.
Falling U.S. Treasury yields help U.S. interest and mortgage rates to remain low in the U.S. since other treasury yields are directly correlated to daily swings of the 10 Year Treasury.
Second Quarter Earnings Season Kicks Off This Week
Investors will shift away from the impressive June jobs report and begin to pay close attention to 2016 2nd quarter earnings season which kicks off this week with aluminum maker Alcoa reporting on Monday July 11th followed by some bank earnings later in the week.
JP Morgan Chase & Co report on Thursday before the opening bell.
Uncertainty about the impact from the U.K’s June 23rd referendum vote to leave the EU is expected to be a cited concern repeated during Q2 earnings calls and forward guidance with multi-national corporations.
According to Factset, for Q2 2016, the estimated S&P 5000 earnings decline is -5.6 percent which is below the previous estimated earnings decline of -2.8 percent from March 31st at the close of 1st quarter 2016.
The information technology sector has recorded the largest decrease in expectations for year over year earnings compared to the start of the quarter (-7.2 percent from -0.2 percent) while the industrials sector has recorded the largest increase in expectations ( -2.6 percent from -4.5 percent).
Factset noted that if the S&P 500 index reports a decline in earnings for Q2, it will mark the first time the index has recorded five consecutive quarters of year over year declines in earnings since Q3 2008 through Q3 2009 which came during a dismal period when the U.S. economy was struggling to move out of recession.
Rich S&P 500 P/E Valuations
As of July 8th when Factset released their earnings insight report, the forward 12 month P/E ratio of the S&P 500 was 16.6 which was higher than the 5 yr. average of 14.6, and more than the 10 yr. average of 14.3.
For Q2 there are 81 companies which have issued negative EPS guidance and 32 companies issued positive EPS guidance.
The Week Ahead
Besides corporate earnings season kicking off this week, investors will also be paying attention to retail sales for June that will be reported on Friday and new inflation figures for June released on Thursday (PPI-Producer Price Index) and (CPI- Consumer Price Index) on Friday.
Economists from briefing.com have a consensus estimate of a 0.2 percent increase in retail sales in June, lower than 0.5 percent in May.
U.S. Economic Calendar
Tuesday- Wholesale Inventories (May)
Wednesday- Fed’s Beige Book, MBA Mortgage Index (7/9), Import/Export prices (June), Crude Inventories (7/9)
Thursday- Initial and Continuing Claims, PPI inflation (June), Natural Gas Inventories (7/9)
Friday- Retail Sales (June), CPI inflation (June), Empire Manufacturing (July), Capacity Utilization (June), Industrial Production (June), Business Inventories (May), Michigan Sentiment