Investors shrugging off Brexit

For the second week in a row, investors shrugged off the Brexit and its potential consequences to send stocks soaring — the Dow roared past the 18,000-point mark and the S&P 500 hit an all-time high during intraday trading on Friday after a scintillating jobs report. And for the second week in a row, investors sought the safety of U.S. Treasury’s, driving the yield on both the 10- and 30-year to new lows.

Stocks posted their best day of the week on Friday after the Labor Department announced that 287,000 new jobs had been created in June, the highest total since October 2015. That number was well above expectations of about 165,000 jobs and a welcome bounce-back after May’s paltry 11,000 (revised down from 38,000 and also impacted by the Verizon strike, since settled, with those returning workers included in June’s total). However, for the second quarter, an average of 147,000 jobs was created each month compared to an average of 196,000 for the first three months of 2016. The separately calculated household rate climbed to 4.9 percent from 4.7 percent, largely because the total labor force rose by 414,000 after having decreased in April and May, though only 67,000 of those jobseekers found work. Wages were up 0.1 percent in June and a healthy 2.6 percent over the last two months, and the labor force participation rate came in at 62.7 percent, a slight improvement from May’s 62.6 percent.

The Fed’s minutes

Before June’s jobs report, many on Wall Street had come to the conclusion that it was unlikely that the Federal Reserve would raise its benchmark rate in 2017 thanks to the fragility of the global economy and the uncertainty engendered by the Brexit. That thinking was bolstered by the minutes from the Fed’s June meeting. Released last week, the minutes showed that the Fed committee members were concerned about a slowdown even before the Brexit. “Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market,” the report said. While the vote to leave the rate unchanged was unanimous, the flip side of the debate among committee members was that the jobless rate is still near the Fed’s target and raising the rate “should not be delayed too long.” Still, on Wednesday — before the unemployment report was released — Daniel Tarullo, a Fed governor, said, “This is not an economy that is running hot” and added that it would take time to assess the impact of the Brexit.

About the Brexit

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The Bank of England said it eased rules to allow it to lend $200 billion to households and businesses. Six British asset management firms announced that for the moment they would not allow investors to pull money from funds that invest in commercial real estate because the assets can’t be quickly liquidated. The International Monetary Fund said because of the vote it reduced its estimate for growth in the eurozone in 2017 from 1.7 percent to 1.4 percent. And, unsurprisingly, Gfk reported that consumer confidence plunged from -1 in June (before the vote) to -9 on July 5, the sharpest drop since 1994 when increases in taxes, interest rates and job insecurity caused the survey number to plummet.

Italy’s banks, Germany’s factories, China’s reserves

As if the Brexit wasn’t causing enough waves in the eurozone, Italy’s banks are facing a crisis because of an estimated $389 billion in bad loans. The Bank of Italy’s Governor Ignazio Visco said the state may have to intervene and that Italy was discussing options with the European Commission. Meanwhile, German industrial production fell 1.3 percent in May after a gain of 0.5 percent in April, its biggest dip in 21 months and an indication of the headwinds created by the political uncertainty in Europe, among other factors. China’s foreign exchange reserves unexpectedly increased by $13 billion to $3.21 trillion in June because its holdings of such safe haven assets as the Japanese yen appreciated sharply in the wake of the Brexit.

In other news, the Fed reported that consumer credit rose $18.56 billion in May from the month before to an annualized rate of 6.18 percent. The Institute for Supply Management said its Non-Manufacturing Index hit 56.5 in June from 52.9 in May; it has been above 50, which signals expansion, for 77 months. The trade balance in May was -$41.1 billion compared to -$37.4 billion in April, with exports falling $0.3 billion to $182.4 billion while imports were up $3.4 billion to $223.5 billion. CoreLogic announced that home prices, including distressed sales, were up 5.9 percent in May from a year earlier. First-time jobless claims for the week ending July 2 fell 16,000 to 254,000; the four-week moving average for the week ending June 25 decreased 2,500 to 264,750.

A look ahead

This week’s updates will include the latest on retail sales, small business optimism, consumer confidence, wholesale and business inventories, the Consumer and Producer Price Indexes, and industrial production and capacity utilization. The Fed will also release its Beige Book report, a snapshot of economic conditions in its 12 districts.

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