- US benchmark stock indices on Friday tracked for their best week of the year.
- Investors read a tepid employment report as a signal the Federal Reserve would consider slashing interest rates – the very sentiment that boosted stocks earlier in the week.
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What trade war?
Stocks in the US jumped Friday, shrugging off concerns about an economic slowdown and placing major indices on track for their best week of the year. Investors interpreted a weaker-than-expected employment report as a sign the Federal Reserve would consider slashing its benchmark interest rate – a move that would at once signal the economy’s historic expansion is losing steam but also benefit corporations by lowering their borrowing costs.
The S&P 500 and Dow Jones Industrial Average each rose by 1%, and the Nasdaq Composite rose by nearly 2% on Friday. The S&P, up 4.5% this week, and the Dow, up 4.8%, were tracking for their best weeks since November. Meanwhile the Nasdaq was on track for its best week since March.
“The market reaction to the weak US employment report for May suggests that investors are putting a lot of faith in the Fed and its ability to keep the economy strong,” Andrew Hunter, a senior US economist at Capital Economics, told investors in a Friday memo.
To be fair, the market is coming off a pretty dismal month, so investors have also swooped in to to buy the proverbial dip. May was the market’s first month of losses since December as President Donald Trump’s trade disputes with key international trading partners knocked global equity prices around.
Some market participants doubt that US stocks can keep rallying on the prospect of a rate cut alone. They include Capital Economics’ Hunter, who said investors are discounting signs that economic growth is slowing.
“We think that their hopes are misplaced, which is the key reason we expect the S&P 500 to fall sharply before the year is out,” he said in a note on Friday.
The Trump administration’s trade disputes with Mexico and China, the biggest trade partners to the US, remain a huge wildcard for investors of all stripes. And it’s the very reason Federal Reserve Chairman Jerome Powell signalled earlier this week that an interest rate was not off the table for the central bank – a revelation that boosted stocks.
Billionaire investor Stanley Druckenmiller, the founder of Duquesne Capital, suggested Friday in an interview on CNBC prior to the employment report’s release that the Federal Reserve would factor a weak headline jobs number into its near-term outlook.
“I don’t use the job numbers to predict the economy,” he said. “It’s just unbelievable the obsession with a lagging indicator. I use them for entry and exit points to fade. But I think if the job number is weak given everything else they’re saying, the Fed will be on a clearer easing path by July.”
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