Friday, June 3, 2016

Markets decline on weak May jobs data

Dow dropped 72, decliners over advancers about 3-2 & NAZ lost another 40.  The MLP index gave up 1 to the 309s & the REIT index was fractionally higher to the 343s.  Junk bond funds were a little lower & Treasuries rallied as demand for safe haven investments increased.  Oil slid back to the 48s & gold shot up 29 on the weak jobs data.

AMJ (Alerian MLP Index tracking fund)

stock chart
Crude Oil   48.93   -0.24 (-0.49%)

Gold     1,244.30   31.70 (2.61%)

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Employers in May added the fewest number of workers in almost 6 years, reflecting broad cutbacks that may raise concern about US growth & prompt Federal Reserve policy makers to put off an increase in interest rates.  The addition of 38K workers, the fewest since Sep 2010, followed a 123K advance in Apr that was smaller than previously estimated, according to the Labor Dept.  The increase in May was less than the most pessimistic forecast.  The jobless rate dropped to 4.7%, the lowest since Nov 2007, as Americans left the labor force.  Smaller employment gains reduce the odds of a more pronounced upturn in household spending & economic growth after a poor start to the year.

The report showed a broad hiring slowdown, including declines in payrolls in construction, manufacturing & mining.  Job growth at private service producers slowed, with employment climbing by just 61K.  That brought the diffusion index, which measures the breadth of hiring, to 51.3 in May, the lowest since Feb 2010.

Furthermore, Americans who are working part-time though would rather have a full-time position, or the measure known as part-time for economic reasons, climbed to 6.4M, the highest since Aug, from 6M a month earlier.  Average hourly earnings rose by 0.2% after a 0.4% gain in Apr that was a bit stronger than initially reported.  Worker pay increased 2.5% over the 12 months ended in May.  The report showed weakness in sectors vulnerable to slow overseas markets & the cutbacks in energy investment, along with hiring slowdowns in services.

Employers Add 38,000 Workers, Fewest in Almost Six Years

American service providers expanded in May at the slowest pace in more than 2 years as companies curtailed orders, pointing to a more muted pickup in the economy after a lukewarm start to 2016.  The Institute for Supply Management non-manufacturing index dropped to 52.9, the weakest since Feb 2014, from 55.7 in Apr.  Readings above 50 in the measure that covers almost 90% of the economy signal growth.  The forecast called for 55.3.  The slump in bookings for non-manufacturing industries that include construction, retail & real estate matched the biggest month-to-month decrease since Nov 2008.  The figures indicate the companies that make up the bulk of the economy are cutting back on capital investment & hiring after a Q1 growth slowdown.  The measure has averaged 54 this year, compared with 57.2 in 2015.  The new orders gauge decreased 5.7 points to 54.2 , while the measure of services employment dropped to 49.7, matching the lowest since Feb 2014, from 53.  The business activity index, which parallels the ISM's factory production gauge, fell to 55.1 last month from 58.8 in Apr.  A measure of prices paid advanced to 55.6, the highest since Sep 2014, indicating costs were rising at a faster pace, from 53.4.  The supplier deliveries gauge, which measures how quickly companies are able to receive orders from suppliers, rose to 52.5 from 51 the prior month.  A reading above 50 means deliveries slowed, which is a positive demand signal as it indicates companies had trouble keeping up.

Service Industries in U.S. Expand at Slowest Pace Since 2014

The US trade deficit increased less than expected in Apr as exports of goods rebounded strongly, suggesting that trade would be a boost to economic growth in Q2.  The Commerce Dept said the trade gap rose 5.3% to $37.4B.  The Mar trade deficit was revised down to $35.5, the smallest since Dec 2013, from the previously reported $40.4B.  Economists had forecast the trade deficit rising to $41.3B.  When adjusted for inflation, the deficit widened to $57.6 B from $56.1B in Mar.  The trade deficit for Apr was smaller than the monthly average for Q1, suggesting trade will probably contribute to GDP in Q2.  Trade has been a drag on GDP growth over the last 3 qtrs.  In Apr, exports of goods increased 2.5% to $120.1B.  Exports have been undercut by a strong $ & sluggish global demand.  With the dollar rally ebbing & US-made goods becoming more competitive on intl markets, some of the weight on exports is starting to lift.  Overall exports of goods and services rose 1.5% to $182.8B in Apr.  Exports to the EU fell 6.0%, while exports to China fell 3.2%.  Imports from China surged 10.5%.  With exports falling, the politically sensitive US-China trade deficit increased 16.3 % to $24.3B in Apr.

Trade Deficit Increases Less Than Expected in April

The silver lining to the dreary jobs report is that is it will give Janet an excuse to do nothing at the Jun FOMC meeting.  On the other hand, dismal economic news is not appreciated by the stock market.  Longer term, Dow has been drifting sideways for months after the plunge early this year followed by the recovery in Mar.

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