Both stocks and bonds headed into Friday with losses for the week. The S&P 500 Index has declined 0.6 percent following a slide in stocks on Thursday. Small-cap stocks also fell on Thursday, but the Russell 2000 Index is still up for the week heading into Friday. Mid-cap stocks remain flat.
A deal in the Greek debt crisis did not come to fruition. The Greek government decided to not pay the IMF, instead choosing to bundle all of its payments for June. This was an option open to the country, but previously they feared how financial markets would interpret the move since it is all but an admission of not being able to pay. This change buys time until the end of the month. The main development was not the Greek or Troika negotiating positions, which remain firm, but the emergence of rebels in the ruling Syriza party. They do not want a deal that leads to more austerity, which could force the leadership to bring in other parties.
Larger than the Greek situation was the bond market mayhem, at least if you are a leveraged bond trader. German government bonds saw their largest two-day increase since 1998 this week, and interest rates around the world moved higher. Europe, Japan, the United States and even some Chinese government bonds fell in price. The 10-year treasury bond yield climbed from 2.1 percent to just shy of 2.4 percent before sliding to 2.3 percent on Thursday. Although the move was significant for a short period of time, interest rates are still well below levels seen just a year ago.
Bond yields were given a boost by strong economic data at the start of the week. Personal income rose in April, construction spending in April was far above forecasts at 2.2 percent growth. Auto sales in May were strong and the manufacturing PMI showed that important sector remain in expansion. The trade deficit for April was much lower than expected, which caused the Atlanta Federal Reserve to increase their growth forecast for the current quarter from 0.8 to 1.1 percent. The Atlanta Fed updates the model as data comes in during the quarter. The ADP employment report showed hiring was solid in May, with 201,000 new jobs.
On Friday, the Labor Department has an even stronger report, showing 280,000 new jobs were created when the market expected 210,000. The unemployment rate however, ticked up to 5.5 percent. Due to the way the government calculates unemployment, the number could rise as the economy improves because workers who stopped looking for jobs may start searching again. Wage growth was also strong, up 0.3 percent in May. The U.S. dollar rallied strongly against the euro and yen following the release of this data.
Only 2 of the 10 sectors in the S&P 500 Index were up for the week heading into Friday: consumer cyclicals and financials. The worst performer was utilities, down nearly 3 percent as rising rates dented the sector. Much stronger than the broad financial sector were bank stocks, in ETFs such as iShares US Regional Banks (IAT) and funds such as Fidelity Select Banking (FSRBX). Banks are best positioned to profit from rising rates because the spread on deposits and loans widens when rates are rising. Insurance companies benefit too because their large pool of assets earn higher returns. Year to date, bank stocks have not done much better than the broader market, but they have been steadily rising. Interest rates are about where they were at the start of 2015, but some bank indexes broke out to new 52-week highs this week. If rates continue to push higher, this sector stands a good chance at moving into a leadership position.