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June's upbeat jobs report helps offset Brexit jitters

William Riegel, Chief Investment Officer TIAA Public Investments


July 8, 2016

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Global equity markets nursed losses for most of the week, buffeted by ongoing Brexit concerns. At the same time, investors anxiously awaited the July 8 release of June’s U.S. nonfarm payrolls report, hoping for a rebound from May’s dismal showing.

They were not disappointed. The report easily outstripped expectations, providing a welcome jolt for markets and lifting the S&P 500 into positive territory (about 1.3%) for the week. In Europe, the broad STOXX 600 Index fell 1.5% (in local terms) for the week, as the late-week rally wasn’t enough to make up for steep losses among financial stocks earlier in the week. 

In Asia, the yen’s rise against the dollar weighed heavily on Japan’s exporter-heavy Nikkei 225 Index. However, Chinese equities gained about 2% for the week, even as the government guided the yuan lower―a move that in the past has rattled markets.

William Riegel, Chief Investment Officer, TIAA Investments


Article Highlights

Current updates to the week’s market results are available here.

Fixed income

Fixed-income markets were not alarmed by June’s strong employment report, concluding that it would not accelerate the Fed’s timetable for further rate hikes. The yield on the bellwether 10-year Treasury note, which began the week at 1.46% and closed at an all-time low of 1.37% on July 5, hovered near that level for the rest of the week. (Yield and price move in opposite directions.) This suggests investors view U.S. Treasuries as reasonably priced relative to the risk of extended wage inflation in the U.S.—a risk that, for now, we deem low. Moreover, Treasury yields are attractive compared to those of other developed-market sovereign bonds.  

With the prospect of continued easing by global central banks, investors kept searching for yield. This boosted demand for non-Treasury “spread sectors,” whose returns ranged from mildly to solidly positive for the week through July 7. Investment-grade and high-yield corporate bonds were notable outperformers.

June’s jobs report far exceeds consensus forecasts

The U.S. labor market capped the second quarter on a high note, generating 287,000 jobs in June. As more people entered the work force, the unemployment rate rose from 4.7% to 4.9%, while the labor-force participation rate inched up to 62.7%. Payrolls for April and May were revised down by a combined 6,000.

Even though June’s employment growth was a substantial improvement over May’s revised total of just 11,000, we wouldn’t read too much into the jump. Monthly payrolls data historically has been volatile. Additionally, the U.S. jobs engine, as we had anticipated, is downshifting. On average, 147,000 jobs have been created over the past three months―a solid but slower pace than we saw last year and consistent with the economy’s approaching full employment.  

However, after showing signs of picking up earlier in the quarter, average hourly wages rose just 0.1% in June and 2.6% compared to a year ago, levels that are below what we would expect at this stage in the employment cycle. Without further and steady improvement on this front, the Fed is likely to hold off on raising interest rates.

Among the week’s other data releases:


Although the eventual impact of the British vote on markets is hard to forecast, we believe that the short-run outcomes will include a slowing of economic activity, if not outright recession, in the U.K., along with a slowdown in the Eurozone. The Brexit issue has been compounded recently by concerns over Italian banks, which are burdened by high levels of non-performing loans. 

Despite this uncertain and challenging backdrop, we continue to overweight Eurozone stocks. First, valuations in Europe are more attractive than those in the U.S. Also, slower growth on the continent will likely lead to even more European Central Bank stimulus, which often acts a springboard for equity markets.

Meanwhile, China seems to be posing less of a risk to the equity landscape. While we remain concerned about the effects of a further decline in the yuan, the British pound’s steep drop has provided cover for China to guide the currency lower without unsettling markets. Additionally, China’s stockpile of currency reserves increased last month, a sign that capital flight seems to have eased.

As for U.S. stocks, corporate earnings are set to rise after a year of stagnation, supported by a weaker dollar, low interest rates, and higher oil prices. Put together, we believe these catalysts can support a new high for the S&P 500 by year-end.

In fixed-income markets, investors, including global central banks, will likely maintain their purchases of U.S. Treasuries and investment-grade corporate bonds in the near term. If the strong performance of high-yield bonds is to continue, oil and commodity prices need to remain relatively stable. With absolute yields so low, in the coming months we may see significant bond issuance by investment-grade corporations in order to fund stock buybacks. Such a move may help equity valuations while acting as a modest negative for investment-grade credit quality.