Stocks Rally as US Payroll Report Encourages Economic Optimism

The S&P 500 Index  on Thursday closed up +0.83%, the Dow Jones Industrials Index  closed up +0.77%, and the Nasdaq 100 Index  closed up +0.99%. September E-mini S&P futures  rose +0.77%, and September E-mini Nasdaq futures  rose +0.95%.

Stocks received support from Thursday's stronger-than-expected US unemployment report, which raised hopes for continued solid US economic growth. However, stocks were undercut as the 10-year T-note rose by +7 bp to 4.35% following the unemployment report. Also, the chances of a Fed rate cut at the next meeting on July 29-30 fell to 5% from 23% on Wednesday.

The House passed the Senate's reconciliation bill on Thursday afternoon, sending it to President Trump for his signature. The nonpartisan Congressional Budget Office estimates that the bill will add nearly $3.3 trillion to US budget deficits over the next decade. The fiscal stimulus from the bill will be a net positive for the US economy, but the higher deficit also increases the risk of an eventual debt crisis in the United States.

The approved reconciliation bill included a $5 trillion debt ceiling hike, thus averting the Treasury default that would have occurred in late summer or early autumn without a debt ceiling hike. The debt ceiling hike is designed to last into 2027, which means the markets will not have to worry about that issue over the next two years.

Meanwhile, the Trump administration's campaign against Fed Chair Powell to cut interest rates continued after Treasury Secretary Scott Bessent said Thursday morning in an interview on Fox Business that the Fed appears to be "a little off" on its interest rate setting process since the 2-year T-note yield of 3.76% at the time of his interview was below the Fed's target range for the federal funds rate of 4.25%-4.50%. However, the 2-year T-note yield then rose to 3.88% after the stronger-than-expected US unemployment reports.