THE MARKETSEmployment was top of mind for financial markets last week. Economists and investors hoped May employment information would provide insight to the state of the United States economy, as well as clues about when the Federal Reserve (Fed) may lower the federal funds rate again. Employment data arrives in two reports that offer different perspectives on the employment situation. Last week, the trends were similar – new jobs creation slowed from April to May – although the number of new jobs reported was quite different. Here’s a brief overview: +37,000 new jobs per the ADP National Employment Report. Mid-week, this supplemental report showed fewer new jobs were added in May (37,000 new jobs) than had been created in April (62,000 new jobs). “That was a big miss vis-a-vis what economists were expecting, and so we saw a negative market reaction initially. But if you talk to economists, guess what, they say that ADP number is not a very good predictor of the [Bureau of Labor Statistics] number, and they really give it much less weight, if any weight at all,” reported Julie Hyman of Yahoo!Finance. + 139,000 new jobs per the Bureau of Labor Statistics (BLS). On Friday, the government’s Employment Situation Summary reported more jobs were created than economists had anticipated. However, jobs growth slowed from April (147,000 new jobs) to May (139,000 new jobs), and initial estimates for March and April were revised lower. “While the headline number came in higher than expected, previous months were revised lower — a pattern which has been repeating itself for a while now and which has prompted a lot of head-scratching,” reported Tracy Alloway and Joe Weisenthal of Bloomberg. The pair cited a source who believes one reason for the revisions is that key data about U.S. business closures and business openings arrives after the initial report is issued. The unemployment rate, which is determined by a survey of households, remained steady at 4.2 percent in May. “…the household survey found a 625,000 decline in the labor force, which helps the jobless rate since those not in the workforce aren’t counted as unemployed,” reported Randall Forsyth of Barron’s. So, what did the report tell us about the economy and prospective Fed rate policy? “Not as bad as feared but not as good as it looks. That’s what the latest employment data show. But for financial markets, the numbers suggest that the Federal Reserve may be slower to lower interest rates,” reported Forsyth. By the end of the week, major U.S. stock indexes were all in positive territory year-to-date, reported Connor Smith of Barron’s. Yields on longer maturities of U.S. Treasuries moved higher over the week.
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. ABOUT BORROWING AND LENDING.In the United States, many people engage in short-term borrowing. They use credit cards to acquire goods or services – springing for a dinner out, charging the cost of a new video game, or purchasing a replacement refrigerator. Then, they pay the money back. If the credit cardholder doesn’t reimburse the card provider in full each month, then they will owe interest on the money they’ve borrowed. Buying on credit is fast and convenient, and it can be quite profitable for the lender. In China, the payment system can work differently. It’s more of a “pay now and buy later” approach where buyers lend their money to companies, reported The Economist. “When you get a haircut or eat at a restaurant, the seller encourages you to pay in advance for multiple transactions. You might pay upfront for ten haircuts, or put 1,000 yuan ($140) on a pre-paid card, and the business will, in return, give you extra credit to spend… The bonus the firm adds to the customer’s deposit rises with the size of the initial outlay, and can be large. Customers putting down 10,000 yuan can receive an extra 2,000 yuan to spend in the store. If they use the money within a year, that amounts to an annual “interest” rate of 20 [percent], paid in kind.” See what you know about borrowing and lending by taking this brief quiz. Borrowing & Lending Quiz
Answers: 1) c; 2) c; 3) d; 4) c
Weekly Focus – Think About It“The pleasure of rooting for Goliath is that you can expect to win. The pleasure of rooting for David is that, while you don’t know what to expect, you stand at least a chance of being inspired.” – Michael Lewis, Author
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