Stock Market Update

[BRIEFING.COM] The S&P 500 (+0.5%) and Nasdaq Composite (+0.9%) set fresh all-time highs today due to solid gains in the mega cap space. There was a negative bias under the index surface, though, following the June Employment Situation Report.

The report went the market's way in terms of rate cut expectations, but also stoked some concerns about lower earnings growth in the event that softening labor market conditions translates into lower consumer spending.

Private sector payrolls were up just 136,000, average hourly earnings growth decelerated to 3.9% (from 4.1%) on a year-over-year basis, the unemployment rate pushed up to 4.1% from 4.0%, and persons unemployed for 27 weeks or more accounted for 22.2% of the unemployed versus 20.7% in May, suggesting it has gotten harder to find a new job quickly.

Treasury yields turned lower in response to the jobs report, reflecting increased rate cut expectations. The drop in rates did not translate into support for equities due to the worries about earnings growth. The 10-yr note yield declined eight basis points to 4.27% and the 2-yr note yield fell 12 basis points to 4.60%.

Rate cut expectations moved up in response to the data. The likelihood of a 25-basis points rate cut at the September FOMC meeting moved to 76.3% from 64.1% one week ago, according to the CME FedWatch Tool.

Many stocks participated in downside moves, but names with a high exposure to discretionary spending experienced increased selling compared to other stocks. Homebuilders, entertainment-related names, and cruise line shares are some of the weakest performing stocks in the S&P 500 consumer discretionary sector (+0.5%).

The sector still closed higher today thanks to gains Amazon.com (AMZN 200.00, +2.41, +1.2%) and Tesla (TSLA 251.52, +5.13, +2.1%). The underperformance of some discretionary-related names was a manifestation of concerns about lower earnings growth prospects that were stirred by this morning's data.

• Nasdaq Composite: +22.3% YTD
• S&P 500: +16.7% YTD
• Dow Jones Industrial Average: +4.5% YTD
• S&P Midcap 400: +4.1% YTD
• Russell 2000: -0.02% YTD

Reviewing today's economic data:

• June Nonfarm Payrolls 206K (Briefing.com consensus 185K); Prior was revised to 218K from 272K; June Nonfarm Private Payrolls 136K (Briefing.com consensus 160K); Prior was revised to 193K from 229K; June Avg. Hourly Earnings 0.3% (Briefing.com consensus 0.3%); Prior 0.4%; June Unemployment Rate 4.1% (Briefing.com consensus 4.0%); Prior 4.0%; June Average Workweek 34.3 (Briefing.com consensus 34.3); Prior 34.3
  • The key takeaway from the report is that labor market conditions are softening, which will provide the Fed some cover to cut rates in September if it so chooses.

Looking ahead, Monday's economic lineup is limited to the May Consumer Credit report (Briefing.com consensus $9.5 bln; prior $6.4 bln) at 15:00 ET.