Stocks and bonds fell in price last week, driven by continued brinksmanship in Europe regarding Greece's financial situation, rising German bond yields and a strong May employment number. I expect the situation in Greece to continue without a resolution until late June. The Greek decision to bundle and defer its June payments to the International Monetary Fund (IMF) sets up a final showdown over the next few weeks. This is only the second time in the last 30+ years that a country has taken this approach.
May's employment report was strong from almost every perspective. The 280,000-job gain in non-farm payrolls exceeded the consensus estimate of 225,000, and prior payroll reports were revised higher by 32,000. Average hourly earnings increased by a robust 0.3%, pushing the annual growth rate up to a two-year high of 2.3%. The unemployment rate rose by 0.1% to 5.5% and was driven by an increase in labor force participation of 397,000. The strong job market is pulling people back into the labor force.
Given the strengthening economic data, I feel more convinced that the Fed will increase interest rates at its September meeting. In this environment, I expect:
- The selloff in stocks and bonds to continue in the weeks ahead,
- 10-year Treasury yields to test 2.50% over the next few weeks and possibly sell-off to 3.00% this summer, and
- Stocks, as measured by the S&P 500 Index, to test support at 2,040 over the next few weeks, with downside during the summer to 1,950.
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