Stocks Rally as US Payroll Report Encourages Economic Optimism

The S&P 500 Index ($SPX) (SPY) on Thursday closed up +0.83%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.77%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.99%.  September E-mini S&P futures (ESU25) rose +0.77%, and September E-mini Nasdaq futures (NQU25) rose +0.95%. 

Stocks received support from Thursday's stronger-than-expected US unemployment report, which raised hopes for continued solid US economic growth.  However, stocks were undercut as the 10-year T-note rose by +7 bp to 4.35% following the unemployment report.  Also, the chances of a Fed rate cut at the next meeting on July 29-30 fell to 5% from 23% on Wednesday.

The House passed the Senate's reconciliation bill on Thursday afternoon, sending it to President Trump for his signature.  The nonpartisan Congressional Budget Office estimates that the bill will add nearly $3.3 trillion to US budget deficits over the next decade.  The fiscal stimulus from the bill will be a net positive for the US economy, but the higher deficit also increases the risk of an eventual debt crisis in the United States.

The approved reconciliation bill included a $5 trillion debt ceiling hike, thus averting the Treasury default that would have occurred in late summer or early autumn without a debt ceiling hike.  The debt ceiling hike is designed to last into 2027, which means the markets will not have to worry about that issue over the next two years.

Meanwhile, the Trump administration's campaign against Fed Chair Powell to cut interest rates continued after Treasury Secretary Scott Bessent said Thursday 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 then rose to 3.88% after the stronger-than-expected US unemployment reports.

The Treasury yield curve remains inverted, with higher short-term rates, as the Fed continues to battle the high post-COVID inflation environment and the new inflation pressures from President Trump's tariffs.  Any artificial attempt to cut interest rates below ideal levels could lead to severe inflationary pressures and spark an eventual upward spike in short-term interest rates, potentially triggering a recession.

Mr. Bessent 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 implementing reciprocal tariffs. The EU aims to reach an agreement in principle with the US by the July 9 deadline, according to comments made Thursday by EU Commission President Ursula von der Leyen.  She said there is no way a full trade agreement could be reached by July 9.  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." 

Thursday'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 2.25 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.

The June US unemployment rate fell by -0.1 point to 4.1%, also 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%, 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 June ISM US Services Index rose by +0.9 to 50.8 from 49.9 in May, stronger than expectations for a +0.7 point rise to 50.6.  The June ISM services prices paid index fell by -1.2 points to 67.5 from 68.7 in May, weaker than expectations for a +0.2 point increase to 68.9.

The final-June S&P US services PMI was revised slightly lower by -0.2 points to 52.9 from the preliminary report of 53.1, weaker than expectations for an unrevised report of 53.1.  The final-June S&P US Composite PMI was revised slightly higher by +0.1 point to 52.9 from 52.8, stronger than expectations for an unrevised report of 52.8.

May US factory orders rose +8.2% m/m, in line with market expectations and represented a rebound after May's revised decline of -3.9%.  May US factory orders ex-transportation rose by +0.2% m/m, in line with market expectations.

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 5% for a -25 bp rate cut at the July 29-30 FOMC meeting.

Overseas stock markets on Thursday closed higher.   The Euro Stoxx 50 closed up +0.46%.  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) on Thursday fell -13 ticks.  The 10-year T-note yield rose +6.9 bp to 4.346%.  T-note prices fell sharply 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 was undercut as the House moved towards passage of the Republicans' reconciliation bill during the day, 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 were also undercut as the 10-year breakeven inflation expectations rate rose +2.6 bp to a 2-week high of 2.339%. 

In a bearish factor for T-notes, Atlanta Fed President Bostic on Thursday called for an unchanged monetary policy due to tariff uncertainty and a resilient economy.

European government bond yields moved lower.  The 10-year German bund yield fell -4.9 bp to 2.615%.  The 10-year UK gilt yield fell -7.1 bp to 4.542%.

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

Stocks saw support from strength in the Magnificent Seven stocks, all of which closed higher, except for Tesla (TSLA), which showed a small decline.  Mag 7 stocks that rose by more than +1% included Microsoft (MSFT), Amazon (AMZN), and Nvidia (NVDA).

Chip stocks also showed strength, led by a +2.4% rally in Intel (INTC). Meanwhile, Broadcom (AVGO), ON Semiconductors (ON),  Nvidia (NVDA), and Marvell Technology (MRVL) all closed more than +1% higher.

Synopsys (SNPS) and Cadence Design (CDNS) closed 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.

ASML (ASML) fell -0.6% 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 chip production.  Samsung is installing ASML factory production equipment in that plant.

FedEx (FDX) closed up +0.8% 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.

Datadog (DDOG) closed up more than +14% after S&P announced that it will replace Juniper

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

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

Earnings Reports (7/7/2025)

None.