Despite US Employment Shock, Dow Jumps 400 Points..."Bad News is Good News?"

▲ US stock market, Dow Jones/AI-generated image

As the US employment growth in June was only half of expectations, fears of interest rate hikes subsided, and the Dow Jones Industrial Average jumped over 400 points, once again approaching its all-time high.

According to MarketWatch on July 2 (local time), the Dow Jones rose towards its 20th annual record close as June's job growth came in weaker than expected. The S&P 500 also showed strength amid expectations of easing interest rate burdens, but the Nasdaq pared its gains due to weakness in semiconductor stocks. The US bond market was set to close early at 2 p.m. that day ahead of the Independence Day holiday, the media reported.

According to the US Department of Labor, non-farm employment in June increased by only 57,000, and the unemployment rate was recorded at 4.2%. This figure was significantly lower than the market's expectation of a 115,000 increase. Employment growth for April and May was also revised down by a combined 74,000, amplifying signals of a slowdown in the labor market.

However, the slowdown in employment acted as a short-term positive for the stock market. MarketWatch reported that after the release of the June employment report, the likelihood of a Federal Reserve (Fed) interest rate hike in July decreased, leading to a drop in Treasury yields. The 2-year Treasury yield, sensitive to monetary policy, fell 6 basis points to 4.11% immediately after the employment data release, after being around 4.19% just before the announcement.

The trend for major tech stocks was mixed. Semiconductor stocks were weighed down by concerns over rising memory chip costs. SanDisk fell about 3% in pre-market trading, Arm Holdings dropped about 2%, and Marvell Technology slid 1.5%. Alphabet (GOOGL) fell 1.5% after Europe's top court rejected Google's appeal against a 4.1 billion euro antitrust fine.

Even before the release of the employment figures, Wall Street was meticulously analyzing scenarios based on the numbers. JP Morgan's trading desk estimated a 40% probability that June's job growth would be between 100,000 and 130,000, expecting the S&P 500 to rise by 0.5% to 1% in that range. Conversely, a scenario where job growth fell below 70,000 was given a 5% probability, with the S&P 500 expected to fall by 1.25% to 2% in that range. The actual figure of 57,000 was closer to the weakest scenario, but the market reacted more strongly to the easing of interest rate burdens than to fears of a recession.

This market trend is a typical "bad news is good news" scenario, where weak employment pushes up stock prices. The Dow and S&P 500 welcomed the receding possibility of interest rate hikes, but the Nasdaq was held back by profit-taking in semiconductor stocks and cost concerns. Whether the June employment slowdown solidifies as a signal to lower the Fed's tightening vigilance or is reinterpreted as a concern for economic cooling will be a key variable in determining the next market direction.

[Article Key Summary]

- US non-farm employment in June increased by only 57,000, significantly below the market's expectation of 115,000.

- Following the employment slowdown, the likelihood of a July interest rate hike decreased, causing the 2-year Treasury yield to fall to 4.11% and the Dow Jones to rise over 400 points.

- However, weakness in semiconductor stocks limited the Nasdaq's gains, leading to a mixed market trend between interest rate relief and pressure on tech stocks.

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