Recap: Week Ending June 5, 2015

June 5, 2015

Equity markets traded lower for the second week in a row as important economy data set an uncertain tone of the first trading week of June. Last week the Dow Jones Industrial Average closed the lower by -0.9%. Both the S&P 500 and NASDAQ 100 finished the week lower by -0.69%. The Toronto Stock Exchange, or TSX, finished the week in the red as well, closing down -0.38%. The negative tone was extended to the bond market where the long 30 year US Treasury Bond’s price closed the week down $5.43 or 3.49%. The US Dollar also saw an offer enter its market. Last week the USD Index, which is an index comprised of major currency pairs traded against the USD fell by 0.64%. It is extremely uncommon to see a positive correlation develop in equities, the US Dollar as well as US Treasury markets. Even gold, which commonly moves in the opposite direction to the USD moved lower last week closing Friday at $1171.80 for a weekly loss of $18.70 or -1.57%. Usually when the market exerts such characteristics trading ranges tend to be smaller and little progress in either direction tends to occur.

Last week saw some of the most important economic data which markets are exposed to, the monthly unemployment rates for both Canada and the United States. The May figure for the United States came in at 5.5%, worse than economist expectations of 5.4%. 5.4% also happened to be the reading for the month of April. On a bright note, US Nonfarm Payrolls rose from a previous reading of 221K to 280K beating economist expectations of 225K. Average hourly earnings for US workers also rose from a previous reading of 2.2% in April to 2.3% in May. There were no economists’ expectations for this figure. A move higher in average hourly earnings means that wages are rising and the so-called “slack” in the labour market is starting to thin out. The employment picture was a bit rosier in Canada where the figure for May remained stable at 6.8%. The unchanged reading was also in line with economists’ expectations. The Canadian labour force grew in the month of May, rising from a previous reading of 65.8% to 65.9%. The move higher signals that more people are joining the labour force. The figure surprised many as economists were not expecting a change from the previous reading. On a negative note, the labour productivity on a quarter over quarter basis dropped from a prior reading of 0.3% to -0.1%.

The move higher in the US unemployment rate signalled that the US economy may not be ready for a rise in interest rate rise. With this being said, the beat in Nonfarm Payrolls did signal that there is still some growth occurring in the labour market. Following the release of the figure Friday equities moved lower on the tone of higher rates. The move lower was not as large as many might have expected with the Dow falling 56 points or    -0.31%. A move higher in interest rates signals that the economy is healthier; however, that opportunity for cheap lower interest rate money is over. Many believe that the current rally in equities is a result of borrowing on cheap low-interest rates and reinvesting that money. Despite the notion that higher rates signals the economy is improving, many fear that it will dry up the low-interest rate opportunities many have been taking advantage of in regards to equities.

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