The June jobs report showed further progress in the ongoing repair of the labor market, as the economy added 850,000 new non-farm jobs. It was the strongest month of job creation since last August and followed two months of disappointing results. But the report also showed evidence of the continued friction in the labor market that is keeping job gains from being even stronger. Rather than falling, the unemployment rate edged higher to 5.9 percent, and rather than rising, the labor force participation rate was unchanged. On balance, the report qualifies as progress, but not the substantial further progress the Fed wants to see before shifting policy. As a result, on balance the report will likely be viewed as market friendly.
The Fed has cited several impediments to faster jobs growth, including fear of contracting the coronavirus, uncertainty surrounding school openings, and extended federal unemployment benefits. But that would suggest that once we get closer to September, jobs growth may be poised to accelerate. The extended jobless payments expire in September, and as many as half of the states have already ended the program. School districts are largely hoping for a normal reopening in September, and vaccination rates continue to rise, notwithstanding pockets of resistance. As these headwinds recede, and with economic growth expected to remain exceptionally strong in the second half of the year, the stage could be set for job gains to accelerate sharply, leading to intensified concerns about how soon Fed policy might shift. 

Investors Keeping an Eye on Oil Prices and Second Quarter Earnings 

Already elevated concerns over rising inflationary pressures are being exacerbated by the failure of OPEC+ to reach a new production agreement. A dispute between Saudi Arabia and the UAE over baseline production quotas resulted in no new output agreement among the members. The result is a likely tighter supply and higher prices as the global economy continues to reopen. Domestic crude oil futures are trading at $76.44 a barrel early Tuesday morning, a six-year high and a gain of 58 percent year-to-date. A rising oil price acts as a headwind for economic activity and has in the past been associated with economic slowdowns and recessions. But prices would likely need to climb closer to $100 a barrel before that became a more serious concern, given how strong the economy is at present, as well as the real possibility that OPEC+ eventually does reach an agreement that results in additional supply coming to market, moderating further price increases. 

 While keeping one eye on oil prices, investors will soon be focused on second quarter earnings season, which begins next week. According to Factset, year-over-year growth of 64 percent is now expected, well up from the 52 percent increase expected on March 31. At the sector level, the largest upward revision has come in energy stocks. Year ago comparisons are distorted by the impact of economic lockdowns due to the pandemic. Crude oil averaged $28 a barrel in Q2 2020, and plunged as low as -$38 a barrel as demand evaporated and inventory storage was at capacity, resulting in widespread losses among producers. In contrast, in this year’s second quarter oil averaged $66 a barrel as demand has rebounded and inventories have been reduced.  

How Long Investors Can Ignore the OPEC+ Standoff Remains to be Seen; Inflation Remains a Concern   

Stocks were unfazed by standoff within OPEC+, although talks continued into the long holiday weekend in the U.S. The S&P 500® index rose in each of the five trading sessions last week on its way to a gain of 1.7 percent, and a new record closing high at 4352. This came despite a decline of 1.2 percent in energy stocks. Bond markets were unfazed as well. The yield on the ten-year Treasury note fell 10 basis points to 1.42 percent, its lowest yield since early March. The two-year note yield slipped three basis points to 0.23 percent. Trading this week gives U.S. markets an opportunity to react to the developments in oil. But markets overseas were moderately higher on Monday while U.S. markets were closed, suggesting a muted response. Indeed, equity futures are pointing to a modest decline at the start of trading, and bond yields are little changed. 

Beyond the jobs report, last week’s other economic releases offered additional evidence of solid growth and rising prices. The ISM manufacturing index for June edged down slightly from May but remained at a solid level of activity. Notably, however, the accompanying prices paid index rose to its highest level since 1979. Home prices year-over-year in April rose at the fastest pace in over thirty years. Consumer confidence rose more than expected in June, and initial jobless claims fell to their lowest level since before the lockdown of last spring. This week the ISM services sector report on Tuesday is expected to show solid activity. And the minutes from the June Fed meeting will be eagerly anticipated for any further insight into discussions regarding the tapering of its ongoing bond purchase program. 
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