Strong Job Growth Dampens Hopes for Interest Rate Cut

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By Investors Hub

The major U.S. index futures are currently pointing to a lower opening on Friday as trading is set to resume following the Independence Day holiday on Thursday.

Stock futures came under pressure following the release of a Labor Department showing a substantial reacceleration in the pace of U.S. job growth in the month of June.

The report said employment surged up by 224,000 jobs in June after edging up by a downwardly revised 72,000 jobs in May. Economists had expected employment to increase by about 160,000 jobs.

While the data points to a rebound in the labor market following the weakness seen in May, the report has dampened investor hopes for a near-term interest rate cut by the Federal Reserve.

Stocks showed a strong move to the upside over the course of a holiday-shortened trading session on Wednesday. With the upward move, the major averages added to the modest gains posted on Tuesday to reach new record closing highs.

The major averages ended the session at their best levels of the day. The Dow jumped 179.32 points or 0.7 percent to 8,170.23, the Nasdaq advanced 61.14 points or 0.8 percent to 8,170.23 and the S&P 500 climbed 22.81 points or 0.8 percent to 2,995.82.

The strength on Wall Street came as a batch of largely disappointing U.S. economic data reinforced expectations for a near-term interest rate cut by the Federal Reserve.

Initial buying interest was generated in reaction to a report from payroll processor ADP showing private sector job growth reaccelerated in the month of June but still came in below economist estimates.

ADP said private sector employment climbed by 102,000 jobs in June after rising by an upwardly revised 41,000 jobs in May.

Economists had expected employment to increase by about 140,000 jobs compared to the addition of 27,000 jobs originally reported for the previous month.

“Even with the US-China trade talks back on track (for now at least) the evidence of a slowdown in employment growth should still be enough to persuade the Fed to cut rates in either July or September,” said Paul Ashworth, Chief U.S. Economist at Capital Economics.

CME Group’s FedWatch tool shows an interest rate cut of at least 25 basis points at the Fed’s July meeting is priced into the markets, although Ashworth said expectations of a 50 basis point cut “seem misplaced.”

Stocks saw further upside after a report from the Institute for Supply showing a notable slowdown in the pace of service sector growth added to the optimism about a rate cut.

The ISM said its non-manufacturing index dropped to 55.1 in June from 56.9 in May, hitting its lowest level since a matching reading in July of 2017.

While a reading above 50 still indicates growth in service sector activity, economists had expected the index to show a more modest decrease to 55.9.

A separate report released by the Commerce Department showed the U.S. trade deficit widened by more than anticipated in the month of May, as the value of imports jumped by much more than the value of exports.

The Commerce Department said the trade deficit widened to $55.5 billion in May from a revised $51.2 billion in April. Economists had expected the trade deficit to widen to $54.0 billion.

The wider trade deficit came as the value of imports surged up by 3.3 percent to $266.2 billion compared to a 2.0 percent jump in the value of exports to $210.6 billion.

Andrew Hunter, Senior U.S. Economist at Capital Economics, said the wider than expected deficit suggests net trade was a “slightly bigger drag on second-quarter GDP growth than we had previously anticipated.”

“Despite the recent ceasefire agreed between Presidents Donald Trump and Xi Jinping, we still think it is slightly more likely than not that the trade dispute with China will ultimately escalate further,” Hunter said.

He added, “The upshot is that net trade is likely to remain a modest drag on growth over the second half of this year, which we expect to compound a sharp slowdown in domestic demand growth.”

Interest rate-sensitive commercial real estate stocks turned in some of the market’s best performances on the day, driving the Dow Jones U.S. Real Estate Index up by 1.3 percent.

Significant strength was also visible among housing stocks, which would also benefit from lower interest rates. The Philadelphia Housing Sector Index climbed 1.1 percent to its best closing level in over a year.

Transportation, software and telecom stocks also saw notable strength, moving higher along with most of the other major sectors.

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