Market Week in Review: Upside surprise: What the latest U.S. jobs report may indicate
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of AIS Business Solutions Sophie Antal Gilbert discussed the European Central Bank (ECB)’s expansion of its bond-purchasing program, the surprising U.S. jobs report for May and the latest movements in markets.
ECB increases size of asset-purchase program
On June 4, ECB President Christine Lagarde announced that the central bank will increase the size of its Pandemic Emergency Purchase Program from €750 billion to €1.35 trillion—a €600 billion increase in government debt purchases, Ristuben stated. “Simply put, the ECB’s bond-buying program consists of an enormous amount of money, as the bank seeks to combat deflationary threats across the eurozone and take control of more countries’ yield curves,” he said.
The additional stimulus helped boost European equity markets the week of June 1, Ristuben noted, in addition to bond markets. Government bond yields fell significantly in countries such as Spain, Italy, Greece and Portugal on the back of the news, he said, as bond prices rallied. “Ultimately, the ECB’s announcement was a big and positive development for markets, as it further confirmed the bank’s no limits policy in regards to monetary support,” Ristuben remarked.
U.S. employment report better than feared
In what Ristuben characterized as a stunning surprise, the U.S. jobs report for May delivered much better news than expected, with 2.5 million nonfarm payroll additions and an unemployment rate that came in at 13.3%—still very high, but significantly lower than feared. “The consensus among economists was that May’s unemployment rate would be around 19%, with another 7 to 8 million jobs lost,” he noted.
So, why did the forecasts miss the mark? Ristuben said it’s been extraordinarily difficult to measure both the extent and permanence of the economic lockdowns wrought by the pandemic, in part due to the unprecedented levels of stimulus pumped into the U.S. economy in an attempt to mitigate the damage. “One of the main ideas behind the CARES Act and other government relief bills was that these measures would help keep small employers—particularly those in vulnerable industries—in business, and not result in permanent widespread job losses. Today’s U.S. employment report offers evidence that maybe this wasn’t such a naïve and ridiculous expectation after all,” he remarked.
The report also lends further credence to the belief that both the U.S. and global economy bottomed out a few weeks ago, Ristuben said. In addition, the Institute for Supply Management’s manufacturing PMI (purchasing managers’ index) for May rose to 43.1%—up from an all-time low of 41.5% in April—while the PMI for the services sector climbed from 41.8% in April to 45.4% in May. A reading below 50% indicates contractionary conditions, he noted, meaning that while both sectors are still shrinking, they’re doing so at a slower rate than in April.
Markets rise on evidence of economic recovery
For the past two months, equity and bond markets were trading in a fairly narrow channel, Ristuben said. “10-year U.S. Treasury yields, for instance, were trading between about 60 to 75 basis points, with equity markets range-bound as well,” he stated. That all changed the week of June 1, however, with both the S&P 500® Index and the STOXX® Europe 600 Index advancing approximately 4%, as of midday Pacific time on June 5, with the MSCI Emerging Markets Index climbing roughly 6% during the same timeframe.
The 10-year U.S. Treasury note also broke out of its trading range, Ristuben said, with the yield on the benchmark note rising to 0.92%, as of midday Pacific time on June 5. This aligns with his expectation of upward pressure on rates over the next several months, which will likely lead to a modest steepening of the U.S. Treasury yield curve.
“All in all, the recent upward movements in markets are supportive of the idea that a sustainable economic recovery may very well be underway today—and we’re beginning to see some data that supports this belief,” Ristuben concluded.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Russell Investments Financial Services, LLC, member FINRA, part of Russell Investments.
For information on the Financial Industry Regulatory Authority, go to www.finra.org.
Products and services described on this website are intended for United States residents only. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained on this website should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Persons outside the United States may find more information about products and services available within their jurisdictions by going to Russell Investments' Worldwide site.
Russell Investments is committed to ensuring digital accessibility for people with disabilities. We are continually improving the user experience for everyone, and applying the relevant accessibility standards.
Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.
CORP-11686