Stocks Rally on the Stronger-Than-Expected US Payroll Report

The S&P 500 Index ($SPX) (SPY) today is up +0.63%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.60%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.65%.  September E-mini S&P futures (ESU25) are up +0.46%, and September E-mini Nasdaq futures (NQU25) are up +0.51%. 

Stocks are seeing support from today's stronger-than-expected US unemployment report, which raised hopes for continued firm US economic growth.  However, stocks were undercut as the 10-year T-note rose by +6 bp to 4.33% on the unemployment report, and as the chances for a Fed rate cut at the next meeting on July 29-30 fell to 6% from 23% on Wednesday.

Today's June non-farm payroll report of +147,000 was stronger than expectations of +106,000.  The payroll report came as a bit of a surprise, given that the markets had been braced for a weak report following Wednesday's news of a -33,000 drop in the US June ADP employment report, which marked the first decline in 2-1/4 years. The stronger-than-expected payroll increase in June was driven by a rise in employment in state and local governments, including public education.  By contrast, private payrolls rose just +74,000, suggesting labor market weakness outside the state and local governments.  June manufacturing payrolls fell -7,000, matching May's decline.  There was a net upward revision of +16,000 in April-May payrolls.

Also, the June US unemployment rate fell by -0.1 point to 4.1%, indicating a stronger labor market than expectations for a +0.1 point rise to 4.3%.  The June unemployment rate of 4.1% is up from the 8-decade low of 3.4% posted in April 2023.

In some positive news for the inflation outlook, June average hourly earnings rose +0.2% m/m and +3.7%, which was weaker than expectations of +0.3% m/m and +3.8% and down from May's +0.4% m/m and +3.9% y/y.

Initial unemployment claims fell by -4,000 to 233,000, showing a stronger labor market than expectations of 241,000.  Continuing claims were unchanged at 1.964 million, showing a slightly weaker labor market than expectations of 1.962 million.

The May US trade deficit of -$71.5 billion was slightly larger than expectations of -$71.0 billion, and was up from April's revised -$60.3 billion deficit.  May exports fell -4.0% m/m.  May imports fell -0.1% m/m, adding to April's -16.3% plunge.

The House today will continue to work on the Republicans' reconciliation bill after an all-night session. The House passed an important procedural measure last night with a 219-213 vote, sparking speculation that the House may approve the measure today before leaving for the July 4 recess.  House passage would finalize congressional approval and send the bill to President Trump for his signature.  The nonpartisan Congressional Budget Office estimates that the bill would add nearly $3.3 trillion to US budget deficits over the next decade.  The fiscal stimulus from the bill will be net positive for the US economy, but the risks also increase for an eventual debt crisis in the United States.  The reconciliation bill includes a debt ceiling hike necessary to avert a Treasury default when the Treasury runs out of borrowing authority on the so-called "X-date," which falls sometime between mid-August and late September. 

The Trump administration's campaign against Fed Chair Powell to cut interest rates continued after Treasury Secretary Scott Bessent said this morning in an interview on Fox Business that the Fed appears to be "a little off" on its interest rate setting process since the 2-year T-note yield of 3.76% at the time of his interview was below the Fed's target range for the federal funds rate of 4.25%-4.50%.  However, the 2-year T-note yield rose to 3.88% after the stronger-than-expected US unemployment rate.  He also said the administration hopes to fill two empty Fed seats next year, meaning that the administration is hoping Jerome Powell will leave the Fed altogether after stepping down as Fed Chair in May 2026, even though his separate term as a Fed Governor doesn't end until January 2028. 

Trade talks are in focus ahead of the July 9 deadline for reciprocal tariff implementation.  The EU aims to reach an agreement in principle with the US by the July 9 deadline, according to comments made today by EU Commission President Ursula von der Leyen. In other trade deal news, President Trump on Wednesday said that the US had reached a trade agreement with Vietnam. President Trump said on Tuesday that a trade deal with Japan is unlikely, so the country will most likely pay a tariff of 30%, 35%, or "whatever the number is that we determine."  

On the negative side for stocks is the upcoming earnings season, which begins next week.  Bloomberg Intelligence data show that the consensus for Q2 earnings of S&P 500 companies is for a rise of +2.8% year-over-year, the smallest increase in two years.  Also, only six of the 11 S&P 500 sectors are projected to post an increase in earnings, the fewest since Q1 of 2023, according to Yardeni Research.

Federal funds futures prices are discounting the chances at 6% for a -25 bp rate cut at the July 29-30 FOMC meeting.

Overseas stock markets today are higher.   The Euro Stoxx 50 is up +0.15%.  China's Shanghai Composite closed up +0.18%.  Japan's Nikkei Stock 225 closed up +0.06%.

Interest Rates

September 10-year T-notes (ZNU25) today are down -12 ticks.  The 10-year T-note yield is up +5.5 bp at 4.332%.  T-note prices fell sharply today after the US payroll and unemployment rate reports showed a stronger-than-expected US labor market, substantially reducing the odds of a Fed rate cut later this month.  The T-note market is also being undercut as the House appears to be moving toward passing the Republicans' reconciliation bill, which will boost the US budget deficit by a total of $3.3 trillion over the next 10 years, according to the CBO, thus requiring the Treasury to sell more debt to fund the deficit.  T-note prices are also being undercut as the 10-year breakeven inflation expectations rate today rose +2 bp to a 2-week high of 2.332%. 

European government bond yields are trading lower.  The 10-year German bund yield is down -2.7 bp at 2.637%.  The 10-year UK gilt yield is down -4.4 bp at 4.568%.

Swaps are discounting the chances at 6% for a -25 bp rate cut by the ECB at the July 24 policy meeting.

US Stock Movers

FedEx (FDX) is up more than +2% after a double upgrade from BNP Paribas Exane, which said the stock is oversold and that it expects FedEx to continue to outperform its competitor UPS.

ASML (ASML) is down more than -1% after a report by Nikkei Asia that Samsung Electronics is slowing down the construction of a chip factory in Texas due to low demand for the plant's production.

Datadog (DDOG) is up more than +8% after S&P announced that it will replace Juniper

Networks in the S&P 500, effective on the opening of trading on July 9.

Synopsys (SNPS) and Cadence Design (CDNS) are up more than +4% after the Trump administration lifted US export license requirements for chip design software sales in China, which should allow those companies to resume selling software in China.

Olo (OLO) is up more than +13% today after news that private equity firm Thoma Bravo will acquire the restaurant software provider for $10.25 per share in cash.

Earnings Reports (7/3/2025)

MarketAxess Holdings Inc (MKTX).