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Briefing.com Summary:

*The June employment report was softer than expected in terms of payroll increases.

*The unemployment rate dropped to 4.2% in June, driven by a large drop in the civilian labor force.

*The market is tempering its concerns about an imminent rate hike.

The first day of the third quarter was a tough one for the semiconductor stocks, evidenced by the 6.3% decline in the Philadelphia Semiconductor Index. The good news is that the weakness in that momentum leadership group did not rattle the broader market. The S&P 500 Equal-Weighted Index ended the first day of the third quarter with a 0.2% gain.

Day two is bringing some fireworks with the release of the June Employment Situation Report; only the fireworks are less exciting (think sparklers). That's because the report, overall, was not the kind of report that elicits the oohs and aahs that are heard with the fireworks that get shot high into the sky, explode, and produce a cascade of illuminous flares.

Nonfarm payrolls increased by just 57,000, while nonfarm private payrolls rose by just 49,000, driven by a 69,000 increase in private education and health services that was offset by a 61,000 decline in leisure and hospitality. Moreover, one can extrapolate that average hourly earnings struggled again to keep up with inflation. They were up 0.3% month-over-month in June, pitted against a 0.5% month-over-month increase in CPI inflation in May.

The unemployment rate, at 4.2%, will be a nice marker for discussion going into the holiday weekend. That is an historically low unemployment rate. The improvement in June, however, is more statistical than fundamental. The number of employed civilians declined by 507,000 while the civilian labor force declined by 720,000.

The key takeaway from the report for the market, which likes to see the good in the bad, is that the softer payrolls and pressure on real earnings should temper concerns about an imminent rate hike.

The 2-yr note yield, at 4.19% just before the release, is at 4.12% now, down four basis points. The 10-yr note yield, at 4.50% just before the release, is at 4.47%, down one basis point. The probability of a 25 basis point rate hike to 3.75-4.00% at the July FOMC meeting has been cut to 17.6% from 28.9% a day ago, and the probability of at least a 25 basis point rate hike at the September FOMC meeting has been slashed to 50.4% from 64.1% a day ago, according to the CME FedWatch Tool.

Currently, the S&P 500 futures are up 21 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 101 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 207 points and are trading 0.6% above fair value.

Notable headlines from the June Employment Situation Report:

• June nonfarm payrolls increased by 57,000 (Briefing.com consensus: 110,000). The 3-month average for total nonfarm payrolls decreased to 111,000 from 164,000. May nonfarm payrolls revised to 129,000 from 172,000. April nonfarm payrolls revised to 148,000 from 179,000.

• June private sector payrolls increased by 49,000 (Briefing.com consensus: 88,000). May private sector payrolls revised to 97,000 from 120,000. April private sector payrolls revised to 150,000 from 177,000.

• June unemployment rate was 4.2% (Briefing.com consensus: 4.3%) versus 4.3% in May. Persons unemployed for 27 weeks or more accounted for 27.3% of the unemployed versus 27.5% in May. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.9% from 8.1% in May.

• June average hourly earnings were up 0.3% (Briefing.com consensus: 0.3%) on the heels of a 0.3% increase in May. Over the last 12 months, average hourly earnings have risen 3.5% versus 3.4% for the 12 months ending in May.

• The average workweek in June was 34.3 hours (Briefing.com consensus: 34.3) versus 34.3 hours in May. The manufacturing workweek was edged down to 40.3 hours. Factory overtime edged up to 3.2 hours.

• The labor force participation rate decreased to 61.5% from 61.8% in May.

• The employment-population ratio decreased to 59.0% from 59.2% in May.

--Patrick J. O'Hare, Briefing.com