Stocks Close Lower as U.S. Wage Pressures Keep the Fed on Track to Raise Rates

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed down -0.29%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.55%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.35%.

Stock indexes Friday closed moderately lower, with the Dow Jones Industrials falling to a 1-1/2 week low.  Stocks initially whipsawed higher and lower Friday from the smaller-than-expected increase in U.S. June nonfarm payrolls.  Although weaker-than-expected, Friday’s payrolls report was seen as not weak enough to dissuade the Fed from not raising interest rates at this month’s FOMC meeting.

The broader market recovered from its worst levels Friday on positive comments from Chicago Fed President Goolsbee, who said policymakers are on a "golden path" to ease price growth without triggering a recession and that "we're getting to a more sustainable pace, which is what we need to do for inflation."

U.S. Jun nonfarm payrolls rose less than expected, which eases concerns that the Fed will need to ramp up interest rate increases.  However, signs of wage pressures may keep the Fed hawkish after U.S. Jun average hourly earnings rose more than expected.

U.S. Jun nonfarm payrolls rose +209,000, weaker than expectations of +230,000 and the smallest increase in 2-1/2 years. Also, May nonfarm payrolls were revised lower to +306,000 from the initially reported +339,000.  The Jun unemployment rate fell -0.1 to 3.6%, right on expectations.

U.S. Jun average hourly earnings rose +0.4% m/m and +4.4% y/y, stronger than expectations of +0.3% m/m and +4.2% y/y.

The markets are discounting the odds at 89% for a +25 bp rate hike at the next FOMC meeting on July 25-26.  The markets are anticipating a peak funds rate of 5.42% by November, which is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields Friday were mixed.  The 10-year T-note yield climbed to a 7-3/4 month high of 4.090% and finished up +2.5 bp at 4.054%.  The 10-year German bund yield climbed to a 3-3/4 month high of 2.678% and finished up +1.0 bp at 2.637%.  The 10-year UK Gilt yield fell back from a 14-year high of 4.712% and finished down -1.1 bp at 4.650%. 

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +0.32%.  China’s Shanghai Composite Index today closed down -0.28%.  Japan’s Nikkei Stock Index today closed down -1.17%.

Today’s stock movers…

Energy stocks and energy service providers rallied Friday, as the price of WTI crude rose than +2% to a 1-month high.  As a result, Schlumberger (SLB) closed up more than +8% to lead gainers in the S&P 500.  Also, Haliburton (HAL) closed up more than +7%, and Phillips 66 (PSX), Marathon Petroleum (MPC), Marathon Oil (MRO), Diamondback Energy (FANG), and Baker Hughes (BKR) closed up more than +4%.  In addition, ConocoPhillips (COP) and Devon Energy (DVN) closed up more than +2%. 

Regional bank stocks moved higher Friday, with Zions Bancorp (ZION) closing up more than +4%.  Also, Comerica (CMA), Truist Financial (TFC), and Citizens Financial Group (CFG) closed up more than +3%.  In addition, Regions Financial (RF) and Huntington Bancshares (HBAN) closed up more than +2%.  Finally, Lincoln National (LNC), US Bancorp (USB), and KeyCorp (KEY) closed up more than +1%.

U.S.-listed Chinese stocks moved higher Friday, with Alibaba Group Holding (BABA) closing up more than +8% after Reuters reported that authorities are likely to hand down a fine of at least 8 billion yuan ($1.1 billion) on Ant Group, a move that will bring an end to the prolonged regulatory probe of the company. Also, JD.com (JD) closed up more than  +4%, and Baidu (BIDU) and PDD Holdings (PDD) closed up more than +3%. 

Fertilizer producers rallied Friday as worker strikes at Vancover’s port threaten to hit the supply-and-demand dynamics of potassium fertilizer.  As a result, Intrepid Potash (IPI) closed up more than +9%, Mosaic (MOS) closed up more than +5%, and CF Industries Holdings (CF) closed up more than +3%.

Biogen (BIIB) closed down more than -3% to lead losers in the S&P 500 and Nasdaq 100 on concerns that testing requirements and side effect warnings for its Alzheimer’s drug developed with Eisai Co may limit its use. 

Costco Wholesale (COST) closed down more than -2% after reporting Jun comparable same-store sales fell -1.4%, a bigger decline than the consensus of -0.4%. 

Levi Strauss (LEVI) closed down more than -7% after it cut its full-year adjusted EPS forecast to $1.10-$1.20 from a prior estimate of $1.30-$1.40, weaker than the consensus of $1.29.   

Walmart (WMT) closed down more than -2% on signs of insider selling after an SEC filing showed Executive Vice President Rainey sold $1.35 million of shares on Monday.

Across the markets…

September 10-year T-notes (ZNU23) Friday closed up +2 ticks, and the 10-year T-note yield rose +2.5 bp to 4.054%.  The 10-year T-note yield Friday rose to a 7-3/4 month high of 4.090%.  T-notes Friday initially moved lower after the Jun payrolls report kept expectations high for the Fed to raise interest rates at the July 25-26 FOMC meeting. T-note prices were also under pressure on an increase in inflation expectations after the 10-year breakeven inflation rate rose to a 6-week high Friday at 2.285%.  

However, T-notes recovered their losses and posted modest gains, and the 10-year T-note yield fell back from early highs as short covering emerged on comments from Chicago Fed President Goolsbee, who said, "we're getting to a more sustainable pace, which is what we need to do for inflation."

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