Markets rally after unemployment falls to lowest in half a century

Dow soared 196, advancers over decliners better than 3-1 & NAZ surged 127 (good enough for another record).  The MLP index went up 2+ to the 248s & the REIT index rose 3+ to the 382s (record territory).  Junk bond funds were mixed & Treasuries continued strong while stocks rallied.  Oil went up to 62 but had its 2nd straight weekly loss & gold recovered 8 to 1280 (for 5th weekly loss in 6 weeks).

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White House economic adviser Larry Kudlow said that he believes the Federal Reserve is looking into rate cuts.  “With these low inflation numbers, I think the Fed is actually looking at rate cuts, I mean some of which were priced into the market maybe up until a few days ago,” he said.  Last week Pres Trump called for the Fed to lower interest rates, during the FOMC's 2-day policy meeting.  He has been an outspoken critic of not only the Fed, but its chairman, Jerome Powell, for allegedly deterring economic growth.  But Kudlow said the White Houses’ views “intellectually are not really far apart from the Federal Reserve” right now.  “The Fed is independent I’m not going to outguess their timing. They are going to do what they want to do on their own time,” he said.  “What I’ll say is, again, using the analysis, what we found is that all these incentives in the economy, creating strong growth in jobs, with no inflation, and the Fed is looking at the inflation numbers and I don’t think they are inclined to fine tune real GDP. I think they are inclined to think, think low inflation might suggest the need for lower interest rates,” he added.  Kudlow said there is a good chance the US economy could get 4% growth & below 3.6% unemployment at some point this year.

Larry Kudlow: Fed looking at rate cuts

Cleveland Federal Reserve Pres Loretta Mester said that she sees no need to adjust the central bank's current monetary policy & supports the current wait-&-see approach.  Mester said that between robust job gains & stronger GDP growth, the Fed's best course is to continue to act in response to forthcoming economic data.  “I fully support our patient approach to looking at what the data’s telling us as it comes in,” Mester said.  “Our interest rate policy, I think, is exactly appropriate for now and we’ll just see how the economy evolves.”  “The job market is strong and today’s report just reinforces that we have a strong labor market, which is great,” she added.  “We have inflation a little bit below our target, but stable prices. We have productivity growth growing, which is a good positive for the economy.”  Her comments come after the Fed said in Jan it will be “patient” about future adjustments to monetary policy after hiking rates 4 times in 2018.  Pres Trump, however, has blamed Fed officials & higher borrowing costs for curbing economic growth, saying earlier this week that he'd prefer a full percentage point cut to the overnight lending rate.  Still, Q1 GDP expanded by 3.2%, ahead of what had expected, the first time since 2015 that Q1 GDP topped 3%.  It's those positive economic indicators, including todays stronger-than-expected Apr jobs report, that help offset concerns of weaker inflation, Mester said, & justifies patience in current monetary policy debate.  “I do think that we have to take seriously our 2% inflation goal and work to try to get inflation back to our goal over time. But I also agree that we need to be patient about it and we need to look at the data and underlying data to understand what’s going on,” she said.  “I would be concerned if inflation expectations were falling, if aggregate demand was falling, if the signal of low inflation was that growth was going down, but there’s no evidence of that,” she added.

Fed’s Mester says she fully supports the central bank’s patient stance

A trade agreement between the US & China could be a strong catalyst for stocks, even though analysts say the market may have already priced in much of the gains.  Chinese Vice Premier Liu He will travel to DC for talks in the coming week & sources have said a deal is possible by  next Fri.  Trade has been one of the biggest overhangs for the market, but the prospect of successful talks has helped fuel the S&P 500′s 17% gain this year.  Besides trade in the coming week, investors are awaiting Fri's inflation data, important after Federal Reserve Chairman Jerome Powell's comment Wed that weak inflation is transitory, signaling the Fed does not now have to consider an interest rate cut.  That comment from the Fed chief sent markets reeling, since many investors have been positioning in both bonds & stocks for a pre-emptive interest rate cut from the Fed.  Fri's consumer price index will be key, even though unlike the inflation measure the Fed watches, CPI is expected to show inflation running slightly above the Fed 2% target in Apr.  The Fed’s favored PCE deflator had core inflation at 1.6% in Q1.  To close out this week, the Apr jobs report crushed Trader's expectations, adding a robust 263K new hires while the unemployment rate fell to 3.6%, the lowest level in a generation, the Labor Dept.  The forecast was for 190K hires & a 3.8% jobless rate.  Earnings will continue to be a factor in the week ahead.  But if the trade negotiations are resolved, that will be the event that could have ramifications for markets & the economy for months to come.

Trade talks closing in on finish line as markets weigh inflation data, ear…

After buying at midday, the Dow was flattish for the rest of the session (at session highs).  It finished about 1% under the record while NAZ, powered by tech stocks, reached another record close.  The jobs & unemployment data this week was very encouraging for investors.  Next week more economic data is coming along with the hope for a signed US-China deal.

Dow Jones Industrials