Steady Economic Growth, Low Inflation Boosts U.S. Stocks

U.S. stocks finished higher on Friday as investors responded positively to a weaker-than-expected jobs report. Buyers were mostly driven by the idea of lower interest rates over the mid-to-long-term because the jobs data suggests the Fed may be hesitant to raise rates later this year. With interest rates hovering near historical lows, stocks remain an attractive asset class.

The jobs data wasn’t necessarily bad. The headline number just came in under estimate. This suggests steady economic growth. Average hourly earnings were also below the estimate. The combination of steady economic growth and low inflation is bullish for stocks.

In the cash market, the blue chip Dow Jones Industrial Average closed at 21987.56, up 39.46 or +0.18. Banking stock Goldman Sachs contributed the most to the gain. The Dow also rose above 22,000 for the first time since mid-August.

The benchmark S&P 500 Index settled at 2476.55, up 4.90 or +0.20%. Energy was the strongest sector, followed by financials.

The tech-based NASDAQ Composite rose 6.67 or 0.10% to finish at 6435.33.

The strong move by the indexes late in the week, helped the three major indexes post solid weekly gains. The Dow finished the week up 0.8 percent. The S&P 500 rose 1.3 percent for the week and the NASDAQ Composite posted its strongest performance of the year with a solid 2.7 percent gain for the week.

Economic News

The major report on Friday was the U.S. Non-Farm Payrolls report. The headline number showed the economy added 156,000 jobs in August, according to the Bureau of Labor Statistics. Traders had priced in an increase of 180,000.

The government also said that average hourly wages grew at an annualized rate of 2.5 percent, less than expected. Month-to-month, earnings rose 0.1%, below the 0.2% estimate. The unemployment rate increased from 4.3% to 4.4%.

The other major data was the ISM Manufacturing PMI. It posted a solid 58.8, beating the 56.5 estimate and 56.3 previous reading.

Minor reports included Final Manufacturing PMI, which came in slightly above expectations at 52.8. ISM Manufacturing PMI were also marginally above expectations.

Revised University of Michigan Consumer Sentiment came in at 96.8, below the 97.4 forecast. Construction Spending missed the forecast badly with a -0.6% reading.

Crude Oil

U.S. West Texas Intermediate crude oil posted a small gain on Friday, and international benchmark Brent finished slightly lower. The mixed price action was caused by the restarting of some refineries that had been shut down by Hurricane Harvey. The news calmed fears over fuel shortages.

With two refineries restarting, the crack spread, or the difference between crude oil and gasoline prices, fell nearly 11 percent as gasoline prices retreated from two-year highs and demand for crude trickled higher.

In other news, the U.S. Energy Secretary approved up to 4.5 million barrels of crude to be released from the Strategic Petroleum Reserve in response to the impact from Tropical Storm Harvey. This was 3.5 million barrels on top of the 1 million barrels of oil approved as of Thursday.

According to Baker Hughes, the number of oil rigs operating in U.S. fields was unchanged from the prior week. The rig count stood at 759, up from 352 a year ago.

Gold

Gold prices hit a 9 ½-month high on Friday after the release of the disappointing U.S. jobs report, but prices retreated as some investors felt there was still a chance for a Fed rate hike before the end of the year.

The early rally was fueled by a drop in U.S. Treasury yields, with the 10-year note falling to just above 2.10 percent. By the end of the session, however, the 10-year Treasury note yield climbed back to 2.157 percent. This encouraged profit-taking in the gold market.