Wall Street rallied at the start of trading today as rapid deceleration in the number of US job cuts surprised even optimists.
Ironically, a closer look at today’s numbers left investors still feeling apprehensive about the future, encouraging profit-taking.
The Labor Department surprised the market after it unveiled that the American economy shed 345,000 jobs in May, the lowest number in eight months, following a downward revision of 504,000 job losses in April.
Investors cheered not only because the latest figure was substantially better than Bloomberg’s median forecasts for a 520,000 drop, but also because revisions for March and April showed an additional 82,000 payrolls.
‘This is heartening news,’ said Nariman Behravesh of IHS Global Insight, who forecast payrolls would drop by 450,000, matching the lowest estimate in a Bloomberg News survey. ‘The recession is very close to an end. The labour market is still pretty awful, but vastly better than it was.’ [1]
Although the latest data signals a slowdown in the number of job cuts, a careful look at the data reveals that much of the improvement in May came on the back of a rise in education and health sector jobs. The manufacturing sector, meanwhile, continued to get hammered, shedding 156,000 workers, while construction lost 59,000 jobs and professional and business services lost 51,000 jobs.
While the overall deterioration in non-farm payrolls was better than expected, the pool of unemployed Americans grew at a faster pace than anticipated – the report showed that the US unemployment rate jumped to 9.4% in May, higher than Bloomberg’s median forecasts for a rise to 9.2% from 8.9% in April.
In my opinion, the problem here is not so much the non-farm payroll data, it’s the absorption of labour - the supply of unemployed continues to rise while demand for labour is still subdued as a result of the destruction that has taken place so far. As a result, investors felt comfortable locking-in gains.
‘People are coming around to the realisation that the payroll report wasn’t all that good,’ said Dan Greenhaus of Miller Tabak & Co. ‘There are, as always, questions surrounding the birth-death model estimations and as that talk continues, people are focusing on the unemployment rate and other negative parts of the report.’ [2]
By 3.30pm (London time) the Dow Jones Industrial Average had declined 8.02 points (-0.09%) to 8742.22, which was 97.18 points off its earlier high. In the meantime, the S&P 500 had fallen 3.14 points (-0.33%) to 939.32.
Crude oil reacted positively to this afternoon’s non-farm payroll data, but retreated after market sentiment turned sour. July light sweet crude surged to a fresh seven-month high of $70 a barrel but later retreated to $67.84 a barrel, representing a 1.4% decline from its previous close. July Brent, meanwhile, fell 1.5% to $67.65 a barrel.
Energy shares, which tend to correlate to the direction of crude oil, also fell today. By 3.30pm (London time) Chevron Corp had fallen 0.7% to $69.3, while Exxon Mobil Corp declined 0.23% to $72.81. In addition, ConocoPhillips slid 1.4% to $45.35.
US banks were, in contrast, trading higher, with Citigroup up 2% to $12.11, Wells Fargo 1% higher at $25.37 and Morgan Stanley climbing 1.1% to $31.56.
[1] Source: Bloomberg News (5 June 2009)
[2] Source: Bloomberg News (5 June 2009)
By Anthony Grech, Research Analyst, IG Index.
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