US equities extended gains on Friday, despite a stronger-than-expected employment report which is expected to keep the Federal Reserve on a hawkish stance as reports of Chinese stimulus boosted sentiment.
United States
Non-farm payrolls rose from 294k in April to 339k in May, much higher than the forecast 190k. Private payrolls jumped to 283k in May compared to forecasts of 165k, while average hourly earnings rose by 4.3% in May compared to 4.4% in April, almost in line with expectations. Pushing back somewhat on the better jobs data, the unemployment rate rose to 3.7%, more than the forecast 3.5%. In previous months, such a strong report would generally see equities weaken on expectations of further rate increases, however, the continued strength in employment does lower the risk of a recession, increasing the chance the Federal Reserve can indeed engineer a “soft landing” whereby economic growth remains positive and inflation cools. Investors should remain mindful though that labour markets historically remain tight leading to recessions as employers hoard labour and only cut workers as a last resort.
US Non-Farm Payrolls
Chief of investment research at Nationwide, Mark Hackett, commented on the current market performance, “Investors have spent much of the past three years obsessed by the Fed, inflation, and payrolls, though volatility around those reports has settled, reflecting a less emotional market. This is bullish, as less reactivity is a sign of a healthy market.”
The S&P 500 closed 1.45% higher on Friday on broad-based buying. The Dow gained 2.12%, the Nasdaq climbed 1.07% while the Russell 2000 Index was up by 3.56% with the VIX down -6.71% to 14.60. The yield on the 2-Year government bond was up by 15 basis points to 4.50% along with the 10 and 30-year rates by 9 and 7 basis points respectively. Fed Fund futures continue to price in a further 0.25% increase in interest rates in either June or July, although July seems more likely at this stage given recent comments by Fed officials.
Europe
In Europe, the Stoxx 600 Index closed 1.48% higher at the end of trading on Friday with equities rallying on reports from Bloomberg that China is working on measure to stimulate the economy and support the real estate sector. The CAC gained 1.87%, the DAX rallied 1.25% while the FTSE MIB climbed 1.85%. Ahead this week, Eurozone retail sales for April are in focus on Tuesday, followed by the final reading of Q1 GDP on Thursday expected to show the economy was unchanged over the first three months of the year.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open higher today, with ASX futures up by 1.06% to 7,229. The ASX 200 Index ended the day’s trading 0.48% higher at 7145.. News out of China of potential measures to boost the economy helped miners share prices. BHP jumped 2.8%, Rio Tinto added 2.5% while Fortescue Metals firmed 1.7%. In Lithium, Core Lithium gained 3.9 %, Pilbara Minerals rose by 3%, Allkem jumped 3.2, IGO climbed 2.5%, while and Mineral Resources rose by 1.8%. The star performer was De Grey Mining, rocketing 10.04%, while IDP education was the biggest underperformer plummeting -15.76%. This week, traders are pricing in roughly a 50% chance of a 0.25% rate increase when the RBA meets on Tuesday. Further data will be released later in the week including GDP for Q1 on Wednesday along with a speech by RBA Governor Lowe, and Chinese inflation data for May on Friday.
Commodities
In commodities, oil prices soared on Friday on expectations of stimulus from China with WTI and Brent Crude rising by 2.34% and 2.49% to $71.74 and $76.13 respectively. Oil prices are extending those gains this morning, up a little over 3% after Saudi Arabia will cut its production by an additional 1 million barrels per day in July following an OPEC+ meeting over the weekend. In precious metals, the price of spot gold sank by 1.50% to $1,947.97 against a stronger USD and higher yields, spot silver also fell -1.06% to $23.60 while Bitcoin rose 1.17% and is a further 0.5% higher over the weekend. Industrials metals were mixed with copper up 0.44% to $373, nickel retreating by -0.44% to $21,126, and SGX Iron Ore gained 1.78% on Friday and is a further 0.96% higher this morning at $104.90.
WTI Crude Oil
Economic Calendar
5th June 2023
China Caixin Composite PMI (MoM May) 11:45
Germany Balance of Trade (MoM April) 16:00
Eurozone HCOB Services PMI (MoM May) 18:00
US ISM Services PMI (MoM May) 00:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
