Sharp slide for Russell as unemployment rate jumps
Small-cap stocks opened lower, pulled down by a surprising jump in the unemployment rate, which climbed to 5.5%, the highest rate in 3 ½ years. At 9:53 a.m. ET, the Russell 2000 (NYSE:IWM) was down 7.37, or 0.97%, at 755.90.
The headline non-farm payroll figure came in at minus 49,000, which was better than the forecast for a slide of 58,000, but the payroll figure was upstaged by the stunning jobless rate number. Economists had forecast a rise in the unemployment rate to 5.1% from 5%, and a jump of 0.5% is extraordinarily rare. In fact, this marked the biggest monthly jump in the unemployment rate in 22 years.
“The unemployment rate soared in May because of huge surge in the labor force, perhaps because of seasonal adjustment difficulties associated with the ending of the school year,” Steven Wood, chief economist with Insight Economics, said in an email report. “However, this big increase may also have been a catch-up from its slow rise in the past few months. In any event, the number of unemployed has increased by 1.6 million to 8.5 million and the unemployment rate has increased by 1 percentage point to 5.5%. In the post World War II period, every time the unemployment rate has jumped by a full percentage point in the course of a year, the economy has slipped into recession.”
Even the headline figure, which might have been embraced by equity bulls if not for the unemployment rate surge, wasn’t exactly a sign of great things. According to Wood, “The bottom line is that jobs declined in May and the economy has clearly slipped into a mild jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy. Persistent job losses will eventually pull the overall economy into recession.”
This was the kind of head-scratching, out-of-leftfield numbers surprise that can hatch an entire cottage industry of data conspiracy theorists. For now, traders and analysts tilted toward the bullish side of things were explaining away the sudden jump in unemployment as a strange seasonal adjustment for the army of teenagers out to find summer jobs. Also, there was a theory that the data was simply catching up to the reality of things amid a soft labor market.
If the market was going to absorb a bearish stunner on the jobs report, perhaps this was perfect timing — coming in the wake of Thursday’s stock market surge that lifted small caps to the highest daily close of 2008.
The focus for today’s trading will likely center on how to interpret the employment report, but it might be hard for stock market traders to ignore what’s going on in crude oil. The energy market is back on a stampede the last two days, with crude oil prices up nearly $12 dollars a barrel from the lows Thursday morning and rapidly approaching record highs. An Israeli official said that an attack on Iranian nuclear sites might be “unavoidable” and there were still aftershocks stemming from the ECB leader saying that rate hikes in Europe could take place soon, which fueled dollar losses and commodity gains. It’s not as if crude oil is the only place to worry about commodity price inflation either … corn prices jumped 4% Thursday to record highs and grains prices were called higher again this morning. With the dollar sinking fast once again, commodities are back in favor with hot money traders. Shortly after the opening, Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) were the only Dow stocks in the green.
Among large caps of note early today, National Semiconductor (NYSE:NSM) bucked the overall downtrend, climbing 6% shortly after the open following strong earnings results. On the downside, United Airlines (Nasdaq:UAUA) shed 7.1%, as rising crude oil took a toll, and Best Buy (NYSE:BBY) was off 3.9% following an analyst downgrade.
Within broad market sectors, airlines were getting hammered this morning. Casinos, consumer finance, regional banks and thrifts were also getting swamped with sellers. On the upside, energy and commodity shares generated the only gains of note.
Small caps on the move included GeoResources Inc. (Nasdaq:GEOI), which tumbled 16%, gapping lower on the opening following news that the firm will sell 1.53 million shares of stock. Calamos Asset Management (Nasdaq:CLMS) tumbled about 9% without fresh news. Sangamo BioSciences Inc. (Nasdaq:SGMO) was off about 7% early. Bucking the overall downtrend, Inspire Pharmaceuticals (Nasdaq:ISPH) was up 68%, gapping higher on brisk volume on news that the company’s cystic fibrosis drug testing went well.
