Opening Market Update: Jobs Fair

(Friday market open) The debt ceiling fight is over and May jobs data are in. The U.S. economy created a massive 339,000 jobs last month as the labor market showed no signs of slowing down.

More on the jobs report below, but first the market breathed a sigh of relief and stock index futures climbed overnight after the Senate approved legislation last night that will suspend the debt ceiling until 2025.

It then sent the measure to President Biden for his signature, beating a June 5 deadline to avoid a default. The 63–36 Senate vote came one day after an overwhelming 314–117 vote in the House of Representatives on the bill. President Biden plans to sign the bill into law today. The Treasury immediately would be able to begin borrowing and the debt ceiling debate will recede into the background until 2025.

The votes bring an end to weeks of anxiety on Capitol Hill and the markets over when and whether the bitterly divided Congress would find consensus on a debt ceiling bill.

For more Schwab insight on the debt ceiling debate, the voting process, and potential market reaction, read our latest government policy analysis.

• The 10-year Treasury note yield (TNX) rose 4 basis points to 3.65% after the jobs report.
• The U.S. Dollar Index ($DXY) fell slightly to 103.69.
• The Cboe Volatility Index^® (VIX) futures descended to new lows for the year, recently at 15.29.
• WTI Crude Oil (/CL) rose sharply to $71.87 per barrel after the jobs data.

VIX brushed against its lowest level of the year yesterday, closing below 16. Although a lower VIX can mean less fear in the market, it doesn't mean the market can't go lower. In fact, some veteran traders see a low VIX as a contrarian trigger signaling overbought conditions.

Crude popped overnight on relief over the debt ceiling passage and could remain in focus over the weekend as OPEC and its partners meet. It's uncertain whether more production cuts are coming, industry analysts say. There seems to be tension between Saudi Arabia wanting another output drop and Russia saying it's fine with current production levels, industry publication oilprice.com reports.

May jobs report: The U.S. jobs machine remains in overdrive. May's job creation of 339,000 far exceeded the 190,000 analysts had expected. Also, the Labor Department raised its estimates for March and April jobs growth by a combined 93,000. Wall Street analysts have almost continuously underestimated the strength of U.S. jobs creation for over a year.

The monster jobs growth and upward revisions to previous numbers might raise concerns that the Federal Reserve may raise rates when it meets June 13–14. Before today, ideas had been growing that the Fed might pause its long rate-hike cycle to assess the economic impact. A report like this arguably puts pressure on the Fed to do more.

Treasury yields initially spiked on the headline number but eased soon after as investors looked over the rest of the report. Other than the headline, the data looked somewhat friendly for the stock market. Wages rose 0.3%, down from 0.5% in April and in line with analysts' expectations. Unemployment ticked higher, to 3.7%, which isn't necessarily a bad thing because it could indicate more people re-entering the labor market, which would potentially raise competition for jobs and dampen the demand for heavy wage hikes. Labor force participation, however, was unchanged at 62.6%.

Looking at where jobs were created in May, it was a pretty even spread, with no industry really dominating. There were healthy gains across professional and business services, government, health care, leisure and hospitality, and construction, according to the Labor Department. The closely watched manufacturing sector saw little monthly change.

Lululemon (LULU) offered investors a twist late yesterday after mostly lackluster retail results from other large stores. Earnings beat analysts' estimates, and comparable sales jumped 14%. Lululemon's business model caters to higher-end shoppers, which may have helped it at a time when many consumers are worried about the economy. Shares climbed 11% in premarket trading.

Aside from lululemon's impressive earnings, the retail sector continues to raise eyebrows as major stores warn of cautious U.S. consumers. The latest to do so was Macy's (M) on Thursday, which said on its earnings call that customers pulled back more than it had expected. Instead of buying "discretionary" items, consumers appear more focused on food, essentials, and services. Same-store sales fell 8.7% at Macy's last quarter.

One challenge for retailers might be the end of government financial assistance programs associated with the COVID-19 pandemic. The extra cash could have helped goose retailer earnings in 2021 and 2022, but now it appears customers have a bit less money to spend. Also, they may have simply bought most of the discretionary items they need, as personal computer and video game makers have learned after a surge in those items during the pandemic.

Chip firm weighs in: Retailers hogged the earnings spotlight most of the last three weeks, but Broadcom (AVGO) pushed its way in yesterday afternoon, too, amid excitement over the chipmaker's recent deal with Apple (AAPL). Broadcom's quarter beat analysts' estimates on both earnings per share and revenue.

The enterprise side has been a challenge this year for many tech companies. While Broadcom's 3% quarterly growth in infrastructure software didn't exactly set off fireworks, it represented improvement from the prior report. A 9% gain in semiconductor solutions looked healthier. Shares were flat in premarket trading despite the earnings beat and improved guidance, hinting that perhaps investors had hoped for an even stronger outlook.

Stay tuned next week for Apple's Worldwide Developers Conference, which begins Monday. The highlight of this annual conference is usually product announcements, and this year the company's "mixed reality" headset introduction could take center stage. Updates on the iPhone could also be in the cards.

Chances of an interest rate pause at the June meeting stand at 67% as of this morning, according to the CME FedWatch tool. That wasn't changed much from where it was before the jobs report, though the probability of a July rate hike has been climbing.

The pendulum keeps swinging and could continue to perhaps right until the week of the Federal Open Market Committee's (FOMC) June 13–14 meeting. The May Consumer Price Index (CPI) report is due the very day the meeting starts and could provide last-minute direction as Fed policymakers deliberate.

In the near term, the market seems to be building in expectations of the Fed pausing this month and hiking 25 basis points in July. But as we know, that could change quickly based on today's jobs and wages data and the mid-June inflation data.

Ideas to mull as you trade or invest

Spring break: Anyone longing for a slowdown from the crush of data and earnings might get their wish next week. While mid-June becomes busy with the FOMC meeting June 13–14 and key inflation reports, the June 5–9 period looks relatively quiet, perhaps allowing some investors to take a late-spring snooze. A handful of S&P 500 companies report next week, but none of them are behemoths. Campbell Soup (CPB) is one notable name on the calendar, and if you look forward to a bowl of warm soup for your après-ski next winter, this will truly be your week as Vail Resorts (MTN) reports next Thursday. Data-wise, April Factory Orders and the May ISM Non-Manufacturing Index stand out Monday, but there's not much more of note until the following week. Fed speakers will stand down, too, as their quiet period begins ahead of mid-month FOMC meeting. Remember that sometimes when earnings and data are light, the market exhibits more volatility as investors focus on outside news, including geopolitics. Beware of a dull market, the old saying goes.

Elementary, my dear Watson: For the first time in a while, there's a sense of mystery around what the Fed might do at its next meeting, and Sherlock Holmes isn't around to help. Fed funds futures swung sharply this week from better than 60% chances of a June rate hike to better than 70% chances of a pause—the kind of quick reversal not seen often. Somewhat dovish comments from two Fed governors likely influenced expectations, but so did confusion about the U.S. economy. For every solid data point like April job openings, it feels like there's a lackluster one to make the counterargument on rates. Thursday's soft May ISM Manufacturing Index comes to mind. Longer term, the market's pulled back on hopes for sharp rate cuts later this year, with futures recently indicating a 36% probability that the benchmark rate could fall 25 basis points from its current 5% to 5.25% range by December. The probability is just 25% of rates falling 50 basis points or more. Earlier this year, futures trading indicated two to three rate cuts­, but now the highest probability is just one or possibly none.

Yield chase: When investors aren't sure of the Fed's next move, that's a recipe for volatility not just in stocks but in Treasuries, too. Yields came under pressure yesterday on the weak May ISM manufacturing number, but keep an eye on Treasuries following the May jobs data. A hot read could send yields back up, especially if wage growth rises substantially. Volatility would be nothing new for the Treasury market, of course, after the 10-year Treasury note yield traded in a dramatic range of more than 55-basis points between its May low and May high. There's also been lots of volatility in the benchmark 10-year German Bund yield, which fell this week on slower May inflation data. However, European Central Bank (ECB) President Christine Lagarde said Thursday there’s no evidence inflation has peaked, and markets expect another 25-basis-point increase in European rates on June 15. Even so, the 10-year Bund yield remains about 130 basis points below the 10-year U.S. Treasury note yield, a setup that implies investors might be more inclined to look to U.S. markets for fixed income.

June 5: April Factory Orders and May ISM Non-Manufacturing Index

June 6: April Trade Balance

June 7: April Trade Balance and April Consumer Credit and expected earnings from Campbell Soup (CPB)

June 8: April Wholesale Inventories

June 9: No major earnings or data