Stocks Rise Sharply on Weak Jobs and Wages Numbers

The Bureau of Labor Statistics Friday morning reported that the U.S. economy created 146,000 new jobs in June, far below the consensus forecast by analysts that 195,000 new jobs would be reported. The unemployment rate also fell, reaching 5.0 percent for the first time since the September, 2001, attacks on the U.S.; but it still stood for June well above the long period of month-after-month, far lower unemployment rates seen during the latter half of the 1990s, when rates below four percent were typical. The disappointing number of new jobs formed in June followed on the heels of the miserable showing for May, when a revised 104,000 new jobs showed up. Adding even more fuel to concerns about the labor market, the Department of Labor reported on Friday that new claims for state unemployment benefits jumped to 319,000 for the latest reporting week, after falling to 312,000 in the week previous.

Rising stock markets took some analysts by surprise, especially after the Thursday terrorist attacks in the capitol of Great Britain. By the afternoon on Thursday, stocks in the United States had shrugged off the troubles on the other side of the Atlantic, with the major stock indices closing up modestly. Friday's surge of 146 points in the Dow Jones Industrial Average reinforced the view among seasoned investors that, if anything, the terrorist attacks in London would be good for business. For defense and related industries, which will likely reap further government contracts as opposition to massive war and anti-terror spending becomes more muted and decidedly less effective, rising government expenditures by the Bush Administration and a Republican-controlled Congress should translate into better earnings performance.

The weak labor market was good news for investors who have been hoping that the Federal Reserve will soon end its string of rate hikes to ward off inflation. With the economy showing signs of slowing down as it moves into the third quarter, some on Wall Street believe that the Fed might want to give the economy a respite from the record string of rate hikes the U.S. central bank has imposed over the past year.

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Provided businesses can keep operating costs below the rate of inflation, but keep revenues rising at or closer to the inflation rate, company profits should increase.

  This hope was given a bit more life because the Bureau of Labor Statistics' Employment Report also showed that hourly wages rose a modest two-tenths of a percent last month, meaning that inflation is still running ahead of many households' gains in income, since the Report also indicated that the average workweek for an American laborer held constant from the month previous at 33.7 hours.

With respect to interest rates, concern had been mounting in recent months about the way long-term interest rates have not risen as fast as short-term rates, a situation that could ultimately end up in an "inverted yield curve," where long-term yields on government bonds are actually lower than yields on short-term government debt instruments. In the past, inverted yield curves have been a very reliable leading indicator of looming recession or less severe, but still significant, economic slowdown.

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One basis point is one one-hundredth of a percent; thus a rise of nine basis points on a mortgage rate of 5.53% would mean the rate had climbed to 5.62%.

  Some analysts have been cheered by the how long-term yields have actually begun to rise modestly; but a closer look shows that they are not rising as fast as short-term yields, meaning that the entire yield curve has been slipping upward and continuing to flatten, possibly as the precursor to a full inversion later in the Summer or in the Autumn. Perhaps more important to average households is the fact that the recent rise in long-term yields on government debt have begun to show up in mortgage interest rates: mortgage reseller Freddie Mac reported on Thursday that the average rate on the benchmark 30-year, fixed-rate mortgage moved up to 5.62 percent this week, a rise of nine basis points from the week previous. This is the highest rate since the June 16 survey and slightly renews worries among some housing analysts that rates could be headed back above the six percent level that was seen only very briefly in the Spring of this year.

In other news, after weeks of flirting with $60 per barrel, several times touching the mark in intra-day trading, U.S. crude on the New York Merc dispensed with all pretentions of courtship and penetrated deep into new territory, opening Friday at $61.30 per barrel before backing down by day's end to $59.63. The breakout through the sixty buck neckline sent prices at the gas pumps to record levels in some parts of the country just in time for the typical weekend uptick in demand. By Saturday afternoon, gasoline prices had slipped at many stations, but still remained in territory many American drivers have never seen. But as bad as the steep gasoline prices are, right now, analysts are perhaps just as concerned about the out-month futures contracts for petroleum distillates, which are currently priced at levels that indicate a very difficult Winter ahead for U.S. households that use home heating oil.

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A futures contract for a given month is an agreement to deliver a specific amount of a commodity at a specific price on a specific date. A rising current price on a given futures contract indicates investors' expectations of a higher price of the commodity on the delivery date.

  Unlike gasoline, for which—at least to some extent and over a period of months—consumers can reduce their amount demanded, usage rates of heating oil cannot be lowered much at all without significant hardship and discomfort. This means consumers of home heating oil will simply have to eat what could possibly be substantially higher heating costs this Winter, leaving less money for other necessities. Compounding the situation, moderately severe drought conditions in parts of the Midwest have already adversely affected expected supplies of certain grains, and this will, without question, result in higher food prices in the coming months. For many consumers whose hourly wages are already lagging inflation, the outlook through the remainder of 2005 and into next year is not full of cheer; and this might very well translate into serious difficulties for politicians in Washington who stand too close to the President and the party that could end up being blamed for the economic bad times that people will be experiencing.