Payroll Report Lowers Probability of a Near Term Rate Hike

Market indices finished the week little changed after a weaker than expected report on the labor situation raised concern over the durability of the economic expansion.

June 06, 2016    |    By Mike Schwager

Performance for Week Ending 6/3/16:

The Dow Jones Industrial Average (Dow) fell 0.37%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.19%, the Standard & Poor’s 500 Index (S&P 500) finished unchanged and the Nasdaq Composite Index (NASDAQ) gained 0.18%. Sector breadth was mixed with 6 of the S&P sector groups finishing higher and 4 finishing lower. The Utility (+2.49%) sector was the best performer while Financials (-1.29%) lagged.

Index* Closing Price 6/3/2016 Percentage Change for Week Ending 6/3/2016 Year-to-Date Percentage Change Through 6/3/2016
Dow 17807.06 -0.37% +2.19%
Wilshire 5000 21742.32 +0.19% +2.71%
S&P 500 2099.13 0.00% +2.70%
NASDAQ 4942.52 +0.18% -1.30%

*See below for Index Definitions

MARKET OBSERVATIONS: 5/30/16 – 6/3/16

Market indices finished the week little changed after a weaker than expected report on the labor situation raised concern over the durability of the economic expansion. While the report was clearly disappointing it did calm worries that the Fed will hike rates at this month’s FOMC meeting. According to Bloomberg, the probability of a June rate hike fell to 4% from 30% a week earlier.

According to the Labor Department, non-farm payrolls during the month of May rose by just 38K, well short of the 160K expected by economists and the lowest number of jobs added in almost 6 years. In addition, the prior two months’ worth of data were revised lower, now showing the economy added 59K less jobs than originally reported. Average hourly earnings grew by 0.2% during the month and are up 2.5% on a year-over-year basis.

At a speech following the release of the payroll data, Federal Reserve Governor Lael Brainard said the employment report suggests the labor market has slowed. Brainard also warned against raising rates too quickly and that the resiliency of the economic recovery should not be taken for granted. Over the past several weeks, Fed officials have been “telegraphing” that changes to interest rate policy could occur at any of the upcoming meetings. The weak payroll data may have thrown a monkey wrench into that thinking. This coming Monday, Fed Chair Yellen is scheduled to speak and investors will be looking to see how she characterizes the downshift in the labor market as well as for insight on how she views the near term path of policy. Certainly one data report does not make a trend and therefore the Fed will likely want to evaluate at least a couple more months of employment reports before taking any action. This would suggest that the soonest the Fed would move would be at the September meeting – stay tuned.

Beige Book: The Federal Reserve released its Beige Book report last week. The report—which provides an anecdotal summary of economic conditions compiled by the 12 regional Reserve Banks—seemed to conflict a bit with the negative tone of the monthly employment data. The report showed the U.S. economy expanded at a modest pace across most parts of the country. It also noted that employment expanded, wages grew modestly, and pricing pressure was up slightly in most districts. In other words, tighter employment appears to be leading to rising wages and prices are beginning to follow suit. This progression seems to suggest that the Fed is making progress toward its mandate.

The Week Ahead: The focal point in the coming week will be a speech on Monday by Fed Chair Yellen who will address the World Affairs Council in Philadelphia. Investors will look for Yellen’s thoughts on the employment report and how it may impact the forward rate path. As is typical during the week following the payroll report, the data calendar is relatively light. Reports of note include non-farm productivity, unit labor costs, wholesale inventories, and the University of Michigan sentiment report. Earnings season will remain on the backburner with just 3 members of the S&P 500 scheduled to report results.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

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