Dow closes up 263 points, stocks notch best week of the year as jobs report fuels hopes of a Fed rate cut

Dow closes up 263 points, stocks notch best week of the year as jobs report fuels hopes of a Fed rate cut

U.S. economy added just 75,000 new jobs in May

  • The U.S. economy created 75,000 new jobs in May, well below 185,000 predicted by economists
  • Weakening economic data support argument for a cut in interest rates as soon as this summer
  • Major benchmarks notch best week since November

U.S. stocks closed higher Friday, following a weaker-than-expected jobs report, which supported the case for the Federal Reserve to ease interest rates in the near future, amid fears that the U.S. economy is decelerating as trade tensions between the U.S. and counterparts Mexico and China persist.

How did the benchmarks perform?

The Dow Jones Industrial Average DJIA, +1.02% rose 263.28 points, or 1%, to 25,983.94, while the S&P 500 index SPX, +1.05% gained 29.85 points, or 1.1%, at 2,873.34. The Nasdaq Composite Index COMP, +1.66% advanced 126.55 points to 7,742.1, a gain of 1.7%.

On Thursday, the Dow rose 181.10 points, or 0.7%, at 25,720.66, representing its longest string of gains since March 18, according to Dow Jones Market Data. The S&P meanwhile, rose 17.34 points, or 0.6% to 2,843.49, while the Nasdaq added 40.08 points, or 0.5%, to reach 7,615.55.

For the week, the Dow gained 4.7%, the S&P 500 returned 4.4%, while the Nasdaq climbed 3.9%. The Dow and S&P 500 had their best weekly showing since late November, while it was the Nasdaq’s best performance since the week ended Dec. 28, according to FactSet data.

What drove the market?

The U.S. economy added 75,000 new jobs in May, while the unemployment rate held steady at 3.6%, the Labor Department said Friday, far below the 185,000 estimated by economists, per a MarketWatch poll. Estimated job gains for both March and April were cut by a total 75,000, and the three-month moving average of monthly job gains has fallen from 245,000 in January to 151,000 today.

The jobs report follows the smallest increase in private-sector employment in nine years, according to payment processor ADP on Wednesday, which showed that the private sector added 27,000 nonfarm jobs in May, representing the weakest growth since March 2010.

While stock index-futures initially sold off on the news, markets could be entering a period in which bad economic news is good for stock markets, analysts said, as it would increase the chances that the Federal Reserve would move to lower interest rates in the coming months.

Wall Street is increasingly anticipating a reduction of borrowing costs by the Federal Reserve to combat sluggish inflation and the aftershocks of intensifying trade wars between the U.S. and counterparts, including Mexico and China. The market is placing a 25.8% chance of a rate cut at the Fed’s coming policy-setting meeting June 18-19, according to CME Group data.

On the trade front, several news reports suggested the U.S. and Mexico made progress Thursday on a deal that would have Mexico agree to steps to slow the flow of migrants from Central America to the U.S., in return for the U.S. declining to impose tariffs on Mexican imports.

Mexico has also emphasized the need for more U.S. economic aid to potentially subsidize Mexican interdiction efforts, and to support economic development in migrants’ home countries. It remains to be seen, however, whether a deal can be reached in time to avoid the imposition of a 5% tariff on all Mexican imports, set to go into effect Monday. Talks continued Friday, and President Trump tweeted in the afternoon that “ there is a good chance we will” be able to make a deal with Mexico.

There is less reason for optimism that the U.S.-China trade dispute will be resolved soon, with no new scheduled talks between the two powers. Early Friday, the Governor of the People’s Bank of China told Bloomberg that the central bank has “tremendous” room to use monetary policy to stimulate the Chinese economy, should the Sino-American trade spat worsen.

What other data were in focus?

Wholesale inventories rose 0.8%, the Commerce Department said Friday, above the 0.3% consensus expectation, according to Econoday.

Consumer borrowing accelerated in April at the fastest pace in five months, the Federal Reserve said Friday.

What did the analysts say?

“This is the type of [jobs report] the doves will really take to, as it supports the argument for cutting rates beyond politics or trade issues, which were never part of the Fed’s mandate to begin with,” Mike Loewengart, vice president of investment strategy at E-Trade wrote in an email.

“That said, our historically low unemployment rate hasn’t moved, and even though the number came in low we’re still creating jobs, which supports the case that the economy is still expanding,” he added. “So the Fed will have to walk a really thin line.”

Which stocks were in focus?

Barnes & Noble Inc. BKS, +11.07% shares were in focus, after the bookseller confirmed it will be acquired hedge fund Elliot Management Corp., for $6.50 per share, in a deal valued at $683 million, including the assumption of debt. The stock rose 11.1% to $6.62 a share.

Shares of Zoom Video Communications Inc. ZM, +18.41% closed up 18.4%, after the firm announced better-than-expected earnings Thursday evening.

FedEx Corp. FDX, +0.75% announced Friday that it “has made the strategic decision to not renew the FedEx Express U.S. domestic contract with, Inc. AMZN, +2.83% as we focus on serving the broader e-commerce market.” FedEx said that it has derived just 1.3% of its total revenue from Amazon over the past 12 months. FedEx shares rose 0.8%, while Amazon ended the day 2.8% higher.

How did other markets trade?

The yield on the 10-year Treasury note TMUBMUSD10Y, +0.00% retreated nearly .05 percentage point to 2.076%.

Asian stocks closed higher Friday, with Japan’s Nikkei 225 rising 0.5% and South Korea’s Kopsi advancing 0.2%. Markets in China were closed for a holiday. In Europe, stocks were on the rise, with the Stoxx Europe 600 SXXP, +0.93% closing up 0.9%

Crude oil CLN19, +2.76% was on the rise for the second-straight session, while the price of gold GCN19, +0.16%  edged higher. The U.S. dollar DXY, -0.50%meanwhile, fell 0.5% relative to its peers.

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