The equity markets and U.S. dollar traded lower Friday, while gold soared higher on the heels of the release of the Employment Situation report — the key piece of employment data that the Federal Reserve considers for monetary policy.
The report showed that the U.S. economy created the fewest number of jobs in more than five years in May as employment in the manufacturing, mining and construction sectors fell sharply. Payrolls only increased by 38,000 jobs last month, well below the consensus forecast of 164,000.
Gains were also limited by a monthlong strike by Verizon workers and that impacted the report by 34,000 jobs. On the positive side, government and retail trade payrolls were up.
This puts the Fed in a precarious position because it has been signaling a rate hike in the coming months. Traders were speculating on June or July, but since the Fed is data dependent, that course could change. Fed Chairman Janet Yellen is speaking in Philadelphia on Monday, which may alleviate some uncertainty.
"This jobs report complicates matters for the Fed because it does not want to risk growth prospects for the economy going forward. If an aggressive and hawkish Fed policy is implemented, there are risks to the 2 percent GDP the economy seems to be stuck in," explained Bob Lang, founder of Explosive Options. "The Fed needs to be careful how they tread over the next few months, not wanting to push the economy into a recession with few tools left to stimulate. The bond market is not convinced, and gold buyers are back today as non-believers in Fed action."
The S&P 500 ended the week at 2,099 after closing above the psychologically important level of 2,100 on Thursday for the first time since April. Utilities and telecom stocks advanced as investor were in search of yield, while the financial sector slumped following the jobs report and nervousness around rate hike timing. The financials have recovered over the past several weeks in expectation of a hike because higher rates are better for bank margins.
Overall, the S&P 500 digested the jobs data well and paired most of its losses to close lower by 0.2 percent after being down as much as 1 percent. The index traded in a similar pattern throughout the week by opening lower and moving higher toward the market close.
Trading week ahead
Economic data is relatively light and most of the focus will be on interest rate hike speculation. It is important to note that the Jobs Openings and Labor Turnover Survey (JOLTS) will be released Wednesday, which provides additional information on the labor market and breaks down data such as job openings, hires and separations.
The earnings calendar remains light and will continue to be quiet until the second week of July when the season starts up again. Only a handful of notable names are scheduled to report, including: Valient, J.M. Smucker and H&R Block.
In the absence of company-specific news for traders to digest, most of the focus will remain on macro events like an interest rate hike, general economic weakness and the Brexit vote on June 23, in which the United Kingdom will decide whether or not it is leaving the European Union. Uncertainty lies in what type of economic damage and costs would follow a vote to leave.