Big jobs report looms in the week ahead as markets enter the often weak month of June



A trader works on the floor of the New York Stock Exchange.

NYSE

The May Jobs Report is the big event for the week ahead, as stocks enter the often weak month of June. Equities ended May with a mixed performance. Large-cap indices like the S&P 500 and the Dow posted gains. The S&P rose half a percent, and the Dow rose 1.9%. The small-cap Russell 2000 was flat, up 0.1%, and the technology-intensive Nasdaq fell 1.5%.

June has not historically been a strong month for stocks. Bespoke Investment Group points out that over the past 50 years, the Dow Jones has gained only 0.12% in June and has been positive 52% of the time.

But over the past 20 years, June has been much weaker, gaining only 40% of the time. June’s performance is on par with September as the worst month of the year, with the Dow Jones falling on average 0.7%, according to Bespoke.

The economy is at the forefront in the coming week with important readings from the ISM on activity in the manufacturing and services sector, but the most important metric will be Friday’s jobs report. According to Dow Jones, economists expect Friday’s jobs report to show about 674,000 jobs created in May, after the disappointing 266,000 jobs added in April. It was about a quarter of what economists expected.

“You know, if we have two months in a row without meeting job expectations, the market is going to get nervous,” said George Goncalves, head of US macroeconomic strategy at MUFG. “Hope we beat it and it creates a positive buzz, and we go into the Fed meeting and then we’re, ‘Hey, the economy is still on the right track. “

Great June event

The Fed is meeting June 15-16, and market professionals are already predicting it will be the most important event of the month. Fed officials have stressed they will keep politics easy while watching for signs that the economy is really recovering. They also argue that the higher inflation readings are temporary, since the data is compared to a low period last year.

The key for the markets is whether the Fed is starting to believe that inflation is higher than expected or that the economy is strengthening enough to grow without as much monetary support. Fed officials have said they will consider discussing scaling back their quantitative easing bond buying program if they see signs of improvement, and that would be a first step towards hikes in the QE. interest rates, which should not be expected until at least 2023.

If inflation is too high, the Fed’s main weapon in combating it is to raise interest rates.

The prospect of higher interest rates makes the stock market nervous as it would mean higher costs for businesses and less cash. In theory, higher interest rates also mean that investors could potentially choose higher yielding bond investments over stocks.

The next big reading for the economy is Friday’s jobs report, and it looms large as recent inflation readings are much warmer than expected. The most recent was the personal consumption expenditure price index on Friday. It showed core inflation of 3.1% year-over-year, the highest reading for this measure since 1992.

The Fed’s beige book on the economy is due on Wednesday. ISM manufacturing data is due on Tuesday and ISM services are released on Thursday. Fed Chairman Jerome Powell speaks on central banks and climate change at the Green Swan 2021 global virtual conference on Friday.

Soaring inflation

The Fed has said it will tolerate an average inflation range around its 2% target until it sees inflation hold higher. Inflation was mostly below 2%, before the latest figures.

“With the PCE number coming in like all other inflation numbers over the past six weeks, warmer than expected, the market is slowly moving closer to calling the Fed on its view that inflation is transient.” , said Julian Emanuel, Head of Equities and Derivatives. strategy at BTIG.

Emanuel said speculative activity around stocks even this week is a sign of foam and shows a large amount of liquidity in the hands of investors. One of these stocks, AMC, closed at 1.5% on Friday after rising 116% last week, giving it a 1200% gain in 2021.

“The net at the index level is essentially a sideways moving stock market,” Emanuel said. “We still think that when you look at it longer term, the big picture is that this is a bull market that started in March of last year and needs to continue to run. When you look at it over the medium term, the market has every right to be affected and we think they will reinforce their concern that the Fed is not paying enough attention to price stability. “

Emanuel said he had studied what happened to stocks when core PCE was above the Fed’s 2% target. “The average monthly return for months when the core PCE was above 2%, dating back to 1989, is (down) 1.6%, with a marked bias toward more defensive sectors like outperforming Healthcare. and a very pronounced bias for technology of all kinds to underperform, ”he said.

Tech stocks, as measured by information technology sector S&P, rose 1.6% in the past month and are up 5.9% year-to-date. The sector lags behind the 12% gain of the S&P 500.

The best performing sectors have been cyclical since the start of the year, with energy up 36.2%, financials up 28.5%, materials up 20.1% and industry up 18.3%. Communications services, which contains a few Internet growth names, are up 16% year-to-date. Healthcare has outperformed information technology, up 8.6% year-to-date.

Over the past week, the S&P 500 has gained 1.2% to 4,204 and is within 1% of its all-time high. The Dow Jones rose 0.9% to 34,529 and the Nasdaq rose 2% to 13,748.

Red flag?

On the fringes of financial markets, market professionals are paying attention to signs of a huge surge in liquidity in the financial system. Last week, institutions placed unprecedented amounts of money with the Fed, nearly half a trillion dollars on Thursday.

“There is way too much liquidity in the system, and this is happening because of the Fed’s ongoing QE, but also the fiscal stimulus disbursements,” Goncalves said.

He said the funds from trillions of stimulus dollars, including for state and local governments, have yet to be spent but have found their way into the banking system. At the same time, institutions and individuals continue to transfer funds into money market funds, which now hold around $ 4.6 trillion.

These funds also put pressure on the system, as they place funds in treasury bills. Goncalves expects the Fed to raise rates on excess reserves if the situation worsens.

“There is no precedent for this because it is totally related to the fact that there is too much money in the system,” he said.

“Institutions are re-depositing liquidity to the Fed because they don’t have enough banknotes or short-term commercial paper. There aren’t enough fixed income assets for everyone,” Goncalves said. . He said banks are also unwilling to hold excess cash, as it counts in their debt-to-equity ratio, and they would prefer to find other higher-yielding investments.

What he did sparked speculation the Fed would cut its QE program sooner than expected, he said.

Calendar for the upcoming week

Monday

Memorial Day holiday

Tuesday

Earnings: Canopy Growth, Hewlett Packard Enterprise, Ambarella, Zoom video

9:45 a.m. Manufacturing PMI

10:00 a.m. Vice-president of the Fed Randal Quarles

10:00 am ISM manufacturing

10:00 a.m. Construction expenses

2:00 p.m. Fed Governor Lael Brainard

Wednesday

Earnings: Advance Auto Parts, Lands’ End, NetApp, Splunk, Cloudera, PVH, C3.ai

Vehicle sales

8:15 a.m. ADP job

12:00 p.m .: Patrick Harker, president of the Philadelphia Fed

2:00 p.m. Beige book

2:00 p.m .: Raphael Bostic, President of the Atlanta Fed, Charles Evans, President of the Chicago Fed, Robert Kaplan, President of the Dallas Fed

Thursday

Earnings: Broadcom, Lululemon Athletica, Five Below, Hovnanian, Express, JM Smucker, DocuSign, Cooper Cos, CrowdStrike

8:30 a.m. Initial jobless claims

8:30 am Productivity and costs

9.45 a.m. PMI Services

10:00 am ISM Services

12:30 p.m .: Bostic from the Atlanta Fed

1:00 p.m. Kaplan of the Dallas Fed

1:50 p.m. Philadelphia Fed Harker

3:05 p.m. Vice-president of the Fed Quarles

Friday

7:00 a.m. Fed Chairman Jerome Powell on central banks and climate change

8:30 am Employment

10:00 Factory orders



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