Strong U.S. Jobs Data Sets off Chain of Events

U.S. equity markets ended the week on a strong note, propelled by stronger-than-expected employment data. U.S. Treasury yields were boosted by the same news while the U.S. Dollar ping-ponged before closing higher.

Economic Data

According to the U.S. Labor Department, the economy added 222,000 jobs in June. This was much higher than the 179,000 forecast. The unemployment rate inched higher to 4.4 percent from 4.3 percent. Wage growth, which is closely watched by the Fed as an important inflation indicator, rose by only 0.2 percent, slightly below the 0.3% estimate, but above the previous 0.1%.

Late in the session, the U.S. Federal Reserve also released its semiannual monetary policy report. It forecast a gradual increase in interest rates and the imminent, if soft, trimming of its balance sheet although the economy is still expanding eight years into a recovery.

The Fed report said it expects a “gradual” increase in interest rates and for balance sheet normalization to begin this year. The report basically reiterated the assessment delivered by the Federal Open Market Committee in its June monetary policy statement. Fed Chair Janet Yellen will deliver testimony about the report before elected officials next week in Washington.

Additionally, the Fed said the economy will continue to expand at a “moderate” pace and that labor market gains should continue to support income and wealth, supporting consumer spending and as credit continues to loosen.

Finally, the Fed report acknowledged that valuation pressures are on the rise, but seemed to be pleased that stock market gains haven’t been generated by increased borrowing outside of the financial sector.

U.S. Stock Market

The three major U.S. stock indexes closed sharply higher on Friday and marginally higher for the week. The blue chip Dow Jones Industrial Average surged 94.30 points, or 0.44%, on Friday, led by a rally in McDonald’s. The benchmark S&P 500 Index rose 15.43, up 0.64%, finishing at 2425.18. Information technology led the index higher. Finally, the NASDAQ Composite posted the strongest gain, finishing at 6,153.08, up 1.04 percent. The rally was supported by another recovery in the major technology stocks including Facebook, Amazon, Apple, Netflix and Google’s parent stock, Alphabet.

U.S. Treasury Yields

Treasury yields were mostly higher on Friday after the release of the government’s Non-Farm Payrolls report exceeded expectations and strongly supported the case for a Fed rate hike later this year. The benchmark 10-year Treasury Note yield traded to 2.39 percent. The two-year Treasury Note yield which is highly sensitive to monetary policy, rose to 1.40 percent.

Crude Oil and Gold

Crude oil prices fell about 3 percent on Friday after data showed U.S. production and rig counts rose last week. This combined with reports earlier in the week of increased OPEC output, led to a 4 percent drop for the week.

Comex gold prices fell for a fifth straight week, dropping 1 percent to levels not seen since March 15 as investors reacted to the strong jobs report and its impact on U.S. Treasury yields and the stronger U.S. Dollar.

This news added to the already bearish sentiment that was fueled by hawkish remarks from major central banks last week and a shift towards higher-interest rate expectations.