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Dow falls after strong jobs report weakens the case for lower rates

Posted at 5:49 PM, Jul 05, 2019
and last updated 2019-07-05 14:22:26-04

The solid June jobs report is a good sign for the US economy. And investors largely took the news in stride — even though it may have dashed Wall Street’s hopes for a big rate cut from the Federal Reserve later this month.

The Dow was down just 35 points in mid-afternoon trading Friday after the government reported that 224,000 jobs were added last month — much better than expected. The Dow was down more than 200 points at its lowest level of the day.

The S&P 500 and Nasdaq each fell about 0.2%. All three indexes closed at record highs in an abbreviated trading session Wednesday. US markets were closed Thursday for July 4th. Stocks are enjoying a solid week too. The Dow and S&P 500 are each up more than 1% while the Nasdaq has gained more than 1.5%.

“This month’s strong jobs report is certainly uplifting after we saw such disappointing numbers in May, and shows that the labor market is still has plenty of fight left,” said Steve Rick, chief economist at CUNA Mutual Group, in a report Friday morning. “The economy is still healthy right now, despite some concern rising from shakier, more volatile markets.”

But the big rebound in jobs growth — only 72,000 jobs were added in May according to revised figures released Friday — may complicate the picture for the Fed.

As recently as June 20, investors were pricing in a nearly 40% chance of an aggressive half-point rate cut at the Fed’s next meeting on July 31, according to futures traded on the Chicago Mercantile Exchange.

After Friday’s job report, the likelihood of a half-point cut fell all the way to 5%.

“The plot thickens with respect to the Federal Reserve’s decision on interest rates at the end of this month,” said Mark Hamrick, senior economic analyst with Bankrate.com, in a report.

Still, it is highly unlikely that the Fed will just sit tight at its next meeting. Investors are still worried about the US multi-front trade war and the impact that’s having on China’s and Europe’s economies.

Hamrick said the Fed may “still attempt to mollify investors by putting a modest, so-called insurance cut in place. The array of headwinds associated with slowing global growth, trade disputes and tariffs haven’t gone away.”

Investors still think there is a 100% chance of at least a quarter-point rate cut by the Fed on July 31.

But the decreased likelihood for a big rate cut boosted bank stocks, as higher interest rates boost the profitability of banks’ lending businesses.

Shares of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and even troubled Wells Fargo were all higher.

Bond yields spiked as well following the jobs report. The rate for the benchmark 10-year US Treasury rose back above 2%. The US dollar also rallied, which it tends to do after solid domestic economic reports.

Gold prices, which have moved higher recently in part due to expectations of a slower global economy, fell Friday.