Stocks Gain Ground Following Friday's June Jobs Report

U.S. stocks finished nicely higher following the mostly upbeat June nonfarm payroll report that showed job growth for the month was well above projections. Treasury yields extended a recent run and the U.S. dollar was higher, while crude oil prices gave back the previous session's gains and gold was lower. In light equity news, Qualcomm (NASDAQ:QCOM) announced that it has filed a patent infringement complaint against Dow member Apple.

The Dow Jones Industrial Average (DJIA) gained 94 points (0.4%) to 21,414, the S&P 500 Index increased 15 points (0.6%) to 2,425, and the NASDAQ Composite jumped 64 points (1.0%) higher to 6,153. In moderately-light volume, 735 million shares were traded on the NYSE and 1.7 billion shares changed hands on the NASDAQ. WTI crude oil decreased $1.29 to $44.23 per barrel and wholesale gasoline lost $0.03 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price dipped $1.96 to $1,225.08 per ounce, and the dollar index, a comparison of the U.S. dollar to six major world currencies, was 0.2% higher at 96.00. Markets gained modest ground for the week, as the DJIA increased 0.3%, S&P 500 Index ticked 0.1% higher and the NASDAQ Composite rose 0.2%.

Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRKa) $171) announced that its energy subsidiary executed an agreement to merge with Energy Future Holdings Corp in an all-cash transaction totaling $9.0 billion, which the company said will ultimately result in the acquisition of Oncor, the largest electricity-transmission operator in Texas. Berkshire traded modestly higher.

Qualcomm Inc. (NASDAQ:QCOM $55) announced that it has filed a patent infringement complaint with the U.S. International Trade Commission (ITC) against Dow member Apple Inc. (NASDAQ:AAPL $144), seeking to ban certain iPhones from being imported to the U.S.

Shares of both companies traded higher as the technology sector rebounded on the heels of the group's recent rollover after leading the markets higher for the past twelve months to record levels.

June nonfarm payroll report shows job growth easily tops forecasts

Nonfarm payrolls rose by 222,000 jobs month-over-month (m/m) in June, compared to the Bloomberg forecast of a 178,000 increase. The rise of 138,000 seen in May was revised to a gain of 152,000 jobs. The total upward revision to the job gains in May and April was 47,000. Excluding government hiring and firing, private sector payrolls increased by 187,000, versus the forecasted gain of 170,000, after increasing by 159,000 in May, revised from the 147,000 rise that was initially reported. Job growth came in healthcare, social assistance, financial activities and mining, while professional and business services and food services and drinking places remained on upward trends.

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The unemployment rate ticked higher to 4.4% from 4.3%, where it was forecasted to remain, as the labor force participation rate ticked higher from 62.7% to 62.8%. Average hourly earnings rose 0.2% m/m, below projections of a 0.3% gain and versus May's downwardly revised 0.1% increase. Compared to the last year, average hourly earnings were 2.5% higher, versus the prior month's downwardly revised 2.4% pace and below the projected 2.6% rate. Finally, average weekly hours rose to 34.5 from May's unrevised 34.4 rate, where it was projected to remain.

The report showed job growth remains steady, averaging 180,000 per month thus far this year, roughly in line with the average 187,000 seen in 2016, likely not changing expectations of one more rate hike this year and the beginning of balance sheet reduction by the Fed.

The U.S. dollar was higher and Treasury yields added to a recent rally following the employment report, with the yield on the 2-Year note increasing 1 basis point (bp) to 1.40%, the yield on the 10-Year note rising 2 bps to 2.39%, and the 30-Year bond rate gaining 3 bps to 2.93%. Bond yields have rebounded notably from depressed levels seen in mid-June.

However, the Fed noted in its June statement that it was "monitoring inflation closely" and today's weaker-than-expected wage growth suggests inflation remains subdued, possibly throwing a wrench into the Fed's plans if inflation continues to soften. While the labor market is tightening and wages should pick up, structural changes seem to be tempering the gains. We expect one more rate hike this year by the Fed and a gradual reduction in its balance sheet, assuming inflation doesn't slip further. In the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market.

Europe mixed, Asia mostly lower

European equities finished mixed following today's stronger-than-expected U.S. job growth and as U.K. stocks benefitted from a drop in the British pound on the heels of unexpected declines in the nation's manufacturing and industrial production. Oil and gas issues led to the downside as crude oil prices gave back yesterday's gains, while the markets continued to grapple with recent hawkish commentary from global central banks.

Geopolitical concerns remained heightened on the heels of this week's intercontinental ballistic missile (ICBM) test by North Korea and as the G-20 Summit in Germany garnered attention. The G-20 Summit delivered the first meeting between U.S. President Donald Trump and Russian President Vladimir Putin though very few details of the talks were released. The euro was lower versus the U.S. dollar and bond yields in the region were mixed. In other economic news, German and Spanish industrial production grew more than expected and France's trade deficit narrowed more than anticipated.

Stocks in Asia finished mostly to the downside, following the declines in the U.S. ahead of today's June employment report and amid heightened geopolitical concerns with North Korea's latest missile test and the G-20 Summit in Germany garnering attention. Also, the recent rally in global bond yields on a flare-up in hawkish central bank tones remained in focus.

Japanese equities declined despite some weakness in the yen as the Bank of Japan announced ramped up bond-buying operations. Mainland Chinese stocks rose and shares traded in Hong Kong declined amid a rise in foreign exchange reserves for the fifth-straight month in June and weakness in banking, telecom and video game stocks. Australian securities were dragged down by weakness in oil and gas issues as crude oil prices gave back some of yesterday's gains. South Korean equities traded lower and Indian listings finished flat.

Stocks tick higher amid sector divergence

The shortened week for stocks finished with modest gains as the divergence among the major sectors continued to begin the second-half of 2017. Financials extended a rally, along with Treasury yields amid a rise in global bond rates on the recent increase in hawkish sentiment toward global central banks, bolstered by some upbeat data. The U.S. dollar ticked higher as Friday's upbeat domestic labor report was preceded by a plethora of global business activity reports that came in mostly stronger than expected, headlined by U.S. ISM Manufacturing and non-Manufacturing Indexes that unexpectedly showed growth accelerated for June.

Technology stocks modestly pared a recent rollover after Friday's rally, though volatility in the group remained elevated. The energy sector saw pressure to hamstring the markets as crude oil prices fell sharply as continued supply concerns overshadowed some bullish domestic oil inventory data. Conviction appeared stunted by the aforementioned global central bank focus and as geopolitical uncertainty flared-up as North Korea conducted its first ICBM test and the market paid close attention to the G-20 Summit in Germany.

As such, next week's U.S. economic calendar is poised to garner heavy attention as the markets grapple with what path the Fed's monetary policy normalization will take. Inflation will come into focus, with the releases of the Producer Price Index (PPI) and Consumer Price Index (CPI), while key hard data will come in the form of retail sales, as well as industrial production and capacity utilization.

Sentiment and business activity indicators will also be released, courtesy of the Fed's Beige Book, along with the NFIB Small Business Optimism Index and the preliminary July University of Michigan's Consumer Sentiment Index. However, amid the aforementioned market backdrop, next week's two-day Congressional monetary policy testimony by Fed Chairwoman Janet Yellen will likely headline the docket. Also, earnings season is set to kick off with some major companies out of the financial sector delivering results.

Stocks have been drifting along near record highs and background conditions remain relatively positive in the near term. But seasonal tendencies remain a risk and volatility has picked up a bit, so investors should be on alert for a summer pullback. The U.S. economy continues to glide along, with subdued inflation, providing what typically has been a good environment for stocks, though uncertainty regarding future Fed actions has risen. Bond yields have ticked higher and some commodities have recovered, but it's too early to say that the reflation story is regaining credence.

International reports due out next week that deserve a mention include: Australia—consumer confidence. China—CPI and PPI, along with lending statistics and trade balance. India—CPI, industrial production and trade balance. Japan—machine orders and trade balance. Eurozone—industrial production, new car registrations and trade balance. U.K.—employment change.

Written By: Marvin Clark