A holiday-shortened week in the United States ended with a labor-market surprise that reset expectations for monetary policy. The June employment report, released a day early ahead of the Independence Day holiday, showed just 57,000 jobs added — well short of the roughly 115,000 economists had expected and the softest reading since February, with the unemployment rate at 4.2%. Coming two weeks after the Federal Reserve's June meeting, at which the committee under new Chair Kevin Warsh had signaled that its next move could well be a hike, the data challenged that hawkish tilt and gave both bonds and equities room to breathe. Easing tensions between the United States and Iran, with commercial shipping recovering through the Strait of Hormuz, added a second supportive thread by keeping downward pressure on oil prices and inflation expectations.

Equities

US large caps ended the shortened week higher, though the path was uneven. The Dow Jones Industrial Average closed Thursday at a record, and the S&P 500 finished the final session little changed at 7,483.24, while the Nasdaq-100 fell 1.6% that day as investors trimmed technology positions after a strong start to the quarter. Beneath the surface, communication services, financials, and consumer discretionary led, while real estate, utilities, and energy lagged; small- and mid-cap indices declined. Europe outperformed. The STOXX 600 rose 2.3%, its fourth consecutive weekly advance and a fresh 52-week high, with Germany's DAX setting the pace. In Asia, the Nikkei 225 recovered from a midweek semiconductor sell-off to close Friday 1.5% higher at 69,744, and the Hang Seng added 1.3% to 23,350.

Rates & Credit

Treasuries rallied on the payrolls miss, led by the front end as investors pared the odds of a rate increase this year. The 10-year yield ended the week near 4.49%, easing to about 4.46% immediately after the release, while two-year yields fell more sharply, steepening the curve from the short end. Collapsing inflation expectations, helped by lower oil, reinforced the move. In Europe, the benchmark euro-area 10-year yield held near 3.3%. France's OAT spread over Bunds remained wide by historical standards at roughly 75 basis points, while Italy's has narrowed to about 72 basis points from 116 at the start of the year. Credit took the softer data in stride, with investment-grade and high-yield spreads little changed.

Currencies

The dollar index ended the week lower, snapping a two-week winning streak. The euro finished just above $1.14, up about 0.5%. The sharpest move came in the yen: dollar-yen touched 162.84 on Wednesday, its highest since 1986, before the currency rebounded nearly 1% toward 161 after the payrolls data, with traders alert to possible intervention from Tokyo. Sterling held near $1.34, the Swiss franc firmed to 0.8022 per dollar, and emerging-market currencies broadly benefited from the dollar's retreat.

Commodities & Gold

Oil drifted lower before stabilizing, with Brent settling around $72 a barrel and WTI near $68.50, as progress in US-Iran talks and the recovery of shipping through the Strait of Hormuz reduced the geopolitical premium built up earlier in the year. Gold rose 2% to about $4,170 an ounce, its first weekly gain in five weeks, supported by the softer dollar and receding expectations of higher policy rates.

The Week Ahead

Attention turns to Wednesday's minutes from the June FOMC meeting — the first chaired by Kevin Warsh — for detail on how broad the committee's support for a possible hike truly is. Monday brings the US ISM services survey and eurozone retail sales; the Reserve Bank of New Zealand decides on rates Wednesday; China reports inflation Thursday; and Germany's CPI and Canada's June labor report close the week on Friday. Second-quarter earnings season begins in earnest the following week, when the major US banks report.