The S&P 500 headed toward a third weekly increase on a rebound in hiring and economic optimism. The benchmark 10-year Treasury is currently trading at a yield of 2.35 percent, which is lower for the day but seven basis points higher than last week. The euro reached its highest level of the year, at 1.098, against the U.S. dollar, rallying on polls that favor a Macron win in France. Oil regained 2 percent after briefly dropping below a six-month low of $44 per barrel due to mounting concerns over a supply glut. Economic indicators reported mostly favorable numbers, with personal income and spending slightly lower than expected, manufacturing a little stronger than expected, and payroll numbers better than forecast.
Jobs, Jobs and More Jobs
U.S. job gains had a strong increase of 211,000 in April and the unemployment rate unexpectedly fell to 4.4 percent, falling to the pre-crisis lows from May of 2007. These strong numbers followed a weaker reading of 79,000 job gains in March that was impacted by a late Northeast snowstorm. The U6 underemployment rate, which measures part-time employees who would take a full-time job if available, also dropped to 8.6 percent, the lowest since November of 2007. This type of good news might typically ignite inflation fears, but wage pressures, as measured by average hourly earnings, accelerated at a weaker-than-expected 2.5 percent year-over-year gain, indicating that wage inflation is currently being held in check. The strong labor market should support continued increases in consumer spending.
Fed Keeps Rates on Hold
The Federal Open Market Committee (FOMC) met earlier this week and unanimously voted to keep the benchmark Fed funds rate at .75 percent to 1.00 percent range. The central bankers acknowledged recent economic weakness, but stated, “The committee views the slowing in growth during the first quarter as likely to be transitory.” The Fed also noted that they are discussing how to proceed in shrinking its $4.5 trillion in holdings and may start unwinding by the end of this year. Today’s strong employment numbers should help to convince the Fed that the economy is prepared for interest rate normalization. The Fed funds futures have priced in an almost certain 25-basis-point rate hike in June.
Liberty, Equality, Fraternity
Sunday’s French presidential elections have voters facing a choice between joining the wave of populism that has swept other wealthy democracies or renewing their globalized governing principles. Marine Le Pen would like to follow the lead of Great Britain and turn away from the European Union, employing a more nationalist policy of enacting trade barriers and immigration controls. Emmanuel Macron takes the exact opposite view that France can thrive in a globalized world and that remaining in the EU offers the best tools for success. The polls appear to be favoring Macron at this point, but Brexit and the U.S. election surprises are still fresh. The markets will certainly be watching the election results with interest.
Healthcare Debate Continues
House Republicans passed their version of healthcare reform on Thursday by a slim margin, sending the bill to the Senate. Some key Senate Republicans have vowed to set aside the House bill and draft their own plan. Other senators have expressed a desire to have the new plan reviewed by the Congressional Budget Office and other industry experts before bringing the bill to a vote. The healthcare plan passage will be more complicated in the Senate, due in part to rules which make it difficult to pass bills with only 51 votes under a reconciliation process. We expect to see further market volatility for insurers and healthcare providers. It may also slow down the timing of tax cuts and reform, as Congress can’t begin work on the 2018 budget until the healthcare dilemma is solved.
Our Takeaways for the Week
- U.S. payrolls numbers are better than expected, signaling a healthy labor market that can support consumer spending
- The FOMC kept rates unchanged, but looks to June for the next rate hike
- Healthcare reform continues to add to sector volatility