• Market Crumbs

Wall Street Cheers Jobs Data

Image via Erik Mclean on Unsplash

Wall Street was thrown a curveball by the U.S. Bureau of Labor Statistics on Friday, as nonfarm payrolls rose by 2.5 million in May. The unemployment rate subsequently dropped to 13.3% from 14.7% in April.

Both measures blew past estimates, with economists expecting 8.3 million job losses and the unemployment rate to increase to 19.5%.

The 2.5 million jobs gained in May is by far a new record dating back to 1939. The only other previous month in which more than one million jobs were added was in September 1983, when the U.S. economy added 1.1 million jobs.

The sectors showing the largest increase in job gains in May were those most affected by the coronavirus shutdowns. The leisure and hospitality industry added 1.2 million jobs after losing 7.5 million in April. The construction industry saw the second-highest number of job gains in May, with 464,000 jobs added, recovering roughly half of April's losses.

The stock market, despite rallying for the better part of two months on hopes of the economy recovering, soared on the news. The Nasdaq Composite rallied more than 2% to reach a new all-time high. The S&P 500 and Dow Jones Industrial Average rose 2.6% and 3.1%, respectively. The S&P 500 is now less than 6% from its record high, while the Dow is just over 8% below its all-time high.

If the jobs report seems too good to be true, it's because it may have been. As a result of an error in how furloughed workers are counted in the data sample, the BLS admitted the unemployment rate may be understated. The error could make the unemployment rate "about 3 percentage points higher than reported," according to the BLS.

"BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue," the BLS said. "According to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses."

With stocks now at or back near their record highs on optimism over the economy reopening and the latest jobs report, the most common debate remains whether the rally is sustainable or not.

Despite much of the country having reopened, consumers are not spending at the same rate as they were before the coronavirus hit the U.S. All eyes will now be on corporate earnings in the months to come to see if the rebound in stocks is justified.

If it turns out the rebound in the market is justified by earnings, the other elephant in the room, which is far more important to the market, is whether the Federal Reserve can continue to justify the rate at which it has expanded its balance sheet to support the economy.

Leftover Crumbs

  • Oil production cut extended. OPEC+ has agreed to extend the record 9.7 million barrels per day production cut for one more month. The production cut, which began on May 1, will now be extended through the end of July and then reviewed on a monthly basis. "Today we have grounds to be cautiously optimistic about the future, but we are not out of the woods yet and challenges ahead remain to be seen," Saudi Arabia’s Energy Minister Prince Abdulaziz said. "Together we are stronger, together we can restore stability to oil markets and help rebuild the global economy."

  • Apple expands payment plans. Apple will begin offering the iPad, Mac, Apple Pencil and Pro Display XDR at 0% financing over 12 months through its Apple Card. Apple will also offer six month interest-free plans for cheaper products such as the Apple TV, AirPods and HomePod. Apple previously introduced 0% financing on iPhones for two years late last year.

  • Amazon employees file lawsuit. A group of Amazon employees have filed a lawsuit in New York’s Eastern District, alleging the company "sought to create a facade of compliance" through "sloppy contact tracing." "Amazon purports to take responsibility for 'contact tracing,' even while declining to take the most basic steps in tracking worker contacts and in some cases purposefully concealing information about who has contracted the virus from the coworkers," the lawsuit read.

  • AstraZeneca eyes Gilead. AstraZeneca has reportedly approached Gilead Sciences about a merger that would create one of the world's largest drug companies. AstraZeneca reached out to Gilead last month about a deal, but Gilead was reportedly not interested. A merger of the two companies would create a combined entity with a market capitalization of nearly $250 billion, making it larger than Merck & Co and Pfizer. AstraZeneca responded to the report by saying the company does not comment on rumors or speculation.

  • Grubhub lands more suitors. Grubhub, which has been in negotiations with Uber about a potential acquisition, is reportedly also being eyed by European food delivery companies Just Eat Takeaway and Delivery Hero. A sale to a European company may be easier to close given antitrust concerns, which is a reportedly an issue in the talks with Uber. Just Eat Takeaway and Delivery Hero have market capitalizations of $6 billion and $17 billion, respectively, while Grubhub's market capitalization is just over $5 billion.