Fears of market meltdown from Treasury bill surge may be overstated
Main U.S. indexes gain: DJI out front, up ~1.8%
All S&P 500 sectors green: materials lead
KBW regional banking index up >4%
Euro STOXX 600 index up ~1.5%
Dollar, bitcoin gain; crude up >2%; gold down
U.S. 10-Year Treasury yield jumps to ~3.67%
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FEARS OF MARKET MELTDOWN FROM TREASURY BILL SURGE MAY BE OVERSTATED (1205 EDT/1605 GMT)
The U.S. Treasury Department is expected to dramatically increase its issuance of Treasury bills in the coming months as it rebuilds its cash balance once the debt limit is increased.
But that shouldn’t lead to any large market breakdowns, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
“There’s an incredible amount of misinformation about what’s likely to happen after the Treasury Department begins refilling the Treasury General Account,” LeBas said.
While the Treasury is likely to issue around $1 trillion in bills, “which is a lot… the vast majority of those funds are going to be reallocated out of the Fed’s reverse repurchase program,” LeBas said, adding that it “will not have a massive impact on interest rates or other markets.”
Large money market funds are also currently underweight Treasury bills, and as such have a lot of room to absorb the supply, LeBas added, noting that “right now among the five largest money market funds, they only hold 10% Treasury bills, they are way underweight in this sector so they have a lot of room to add.”
LeBas expects that Treasury bill yields may trade around 10 to 15 basis points above other short-term interest rates as a result of the increase in supply.
The U.S. Senate on Thursday passed bipartisan legislation backed by President Joe Biden that lifts the government's $31.4 trillion debt ceiling.
THE GOOD, THE BAD, AND THE UGLY: A JOBS REPORT DRILL-DOWN (1132 EDT/1532 GMT)
Investors were greeted on Friday with a bucket full of surprises in the form of the Labor Department's blow-out May employment report.
First, the U.S. economy added a robust 339,000 jobs last month USNFAR=ECI, a 78.4% upside surprise.
Monthly job adds have landed to the north of the 200,000 level every month since December 2020, and over the last 12 months, have landed north of consensus all but once.
Additionally, April's payroll adds was revised 16.2% higher to 294,000.
The unemployment rate USUNR=ECI rose by a significant 0.3 percentage points, rising off half-century lows to 3.7%.
A quick scan of the topline numbers suggests this report poses a bit of a conundrum for the Fed. The economy's running hot, but wages are cooling and unemployment is rising.
Analysts seem divided.
"Right now, if you're a Fed governor you're very happy with this report," says Oliver Pursche, senior vice president at Wealthspire Advisors. "It continues to demonstrate the economy is resilient. We're not anywhere near a recession right now, and for the FOMC, it means they have elbow room to do the things they want to do."
But on the other hand:
"As for the Fed, this is a nightmare report," opines Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. "Do they stick to incoming VC Jefferson's clear signal of a June pause, just a couple days ago, or do they rewrite the script?"
Taking a gander at the breakdown, the services sector was responsible for a staggering 90.8% of all non-government job adds.
On the other hand, the unemployment rate USUNR=ECI surged 30 basis points to 3.7%, bursting past the expected 10 bp increase analysts expected.
Wage growth, of course, was among the more closely watched elements of the report, offering the first glimpse of last month's inflationary landscape.
Economists saw monthly and annual average hourly earnings cooling down to 0.3% and 4.4%, respectively.
The monthly figure stuck the landing, but year-over-year wage growth arrived just to the south of consensus, at 4.3%.
"The result is squarely within the Fed’s playbook, with the result indicating a continuously growing economy coupled with moderating wage inflation," writes Peter Essele, head of portfolio management at Commonwealth Financial Network.
And given the service sector's disproportionate share of May's job adds, average hourly earnings growth appears set for further deceleration, as services jobs are generally at the lower end of the pay scale.
But before we pop the cork over the cool-down of annual wage growth, it's worth remembering it's still more than double the Fed's average inflation target.
And despite still-hot wage growth, it's still cooler than consumer prices. Real wage growth has been in decline for well over a year.
Here's a look at major indicators and how far they have to descend in their bumpy road back to that target:
Next, we take a look at the tedious labor market participation rate, which held steady at 62.4%, below historical levels.
Ordinarily, a rise the jobless rate hints that more folks are jumping back into the labor pool.
But that didn't happen, and that could be the first clear sign that the labor market is starting to feel the bite of the 315% year-to-date surge in announced layoffs, per Challenger.
A breakdown of total unemployed by duration shows the newly employed account for a thicker slice of that pie.
Layoffs are being felt, but a quick glance at the topline payrolls number shows hiring is hot. Long-term unemployment is inching lower.
At any rate, the distribution of joblessness by length of unemployment appears to have returned to its pre-pandemic balance:
There's some disheartening news in the report to be found in data showing joblessness by race and ethnicity.
Unemployment among Black Americans spiked, jumping nearly an entire percentage point to 5.6% from 4.7%. White joblessness, meanwhile, rose 0.2 ppt to 3.3%, still well below the national average.
Taken together, the Black/White unemployment gap yawned wider, to 2.3 ppts from 1.6 ppts, which was the narrowest reading since 1971.
As for the divide between analysts regarding whether or not this report is good/bad for the Fed, Charlie Ripley, senior investment strategist for Allianz Investment Management believes it's either/both:
"Depending on how you slice it, today’s labor market data provides a little flavor for everyone no matter what side of the fence you are on," Ripley writes. "On balance, the employment data is reflective of the divided views at the Fed and while this provides some backdrop of uncertainty for Fed policy to increase rates at the upcoming meetings, it most certainly means there likely won’t be rate cuts any time soon."
POP BEFORE THE DROP? (1012 EDT/1412 GMT)
U.S. stock indexes opened higher on Friday after data showed a moderation in wage growth in May boosted bets that the Federal Reserve will skip raising interest rates this month, while investors cheered the country averting a debt default.
That said, in the wake of its opening gap higher, the S&P 500 index .SPX jumped more than 1% and hit a high of 4,267.09 about 15 minutes into the session.
With that thrust, the benchmark index nearly tagged weekly Gann Line resistance which now resides around 4,275. The SPX has since backed off slightly and is up around 0.8% on the day.
The Nasdaq .IXIC also jumped more than 1% in early trade and hit 13,252.075, which was its highest level since April 21, 2022. It has also since backed away and is now up just over 0.5%.
Traders will be watching the S&P 500's weekly close vs the Gann Line, as well as the Nasdaq's action throughout the session for signs of an exhausted rise.
Meanwhile, value .IVX is outperforming growth .IGX, With this, growth's four-week winning streak vs value is now at risk.
Here is a snapshot of where markets stood about 40 minutes into the trading day:
U.S. STOCK FUTURES HOLD MODEST GAINS AFTER MAY JOBS DATA (0900 EDT/1300 GMT)
U.S. equity index futures are modestly green in the wake of the release of the latest data on U.S. employment.
The May non-farm payroll headline jobs number came in at 339k, which was well above the 190k estimate. The unemployment rate was 3.7% vs a 3.5% estimate. Wage data, on a month-over-month basis was in-line with the estimate. On a year-over-year basis, it was cooler than expected:
According to the CME's FedWatch Tool FEDWTACH, the probability that the Fed sits on its hands and leaves rates unchanged at its June meeting is now around 63% from 74% just prior to the data coming out. The chance of a 25 point rate hike is now 37% from 26% just before the numbers were released.
E-mini S&P 500 futures EScv1 are higher, gaining around 0.5%. In the wake of the Senate passing a bill late on Thursday to lift the government's $31.4 trillion debt ceiling, avoiding a catastrophic, first-ever default, the futures were up around 0.4% just before the numbers came out.
A majority of S&P 500 sector SPDR ETFs are higher in premarket trade, with energy XLE.P, up around 1.5%, showing the biggest gain. Communication services XLC.P is the weakest group, off about 0.6%.
The SPDR S&P regional banking ETF KRE.P is up around 1.4%.
Regarding the jobs data, Art Hogan, chief market strategist at B Riley Wealth, said:
"The average hourly earnings, which is probably the more important piece of information which was estimated to be at 4.4%, came in at 4.3%. The Fed pays more attention to that particular line in the report then they do to the headline number."
With this Hogan noted that the unemployment rate surprisingly moved higher in what is the first significant bump up and something that the market has been waiting for.
Hogan added "This is a reflection of a labor market that while still robust, is softening gently, not rapidly. That's exactly what the Fed would like to see. The Fed wants to tame inflation without crushing the jobs market, and this is another piece of evidence that they're actually well along their way to getting that accomplished."
Hogan thinks the Fed has enough evidence in hand to take a pass at the next meeting and remain data dependent for the July meeting.
Here is a premarket snapshot just shortly before 0900 EDT:
(Terence Gabriel, Shristi Achar)
FOR FRIDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
Nonfarm payrolls https://tmsnrt.rs/3CftL8p
Services payrolls https://tmsnrt.rs/3ISnVh8
Labor market participation rate https://tmsnrt.rs/3C8VAzj
Unemployment duration https://tmsnrt.rs/45LN7zC
Unemployment by race and ethnicity https://tmsnrt.rs/43Fb7CJ
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)</body></html>
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