Market Update

• Stocks turn lower; gold, Treasuries jump after jobs report miss. U.S. and European equities reacted negatively to a headline nonfarm payrolls figure that came in well below consensus, though the report overshadowed positive U.S. trade data. European indexes quickly turned red after spending most of the day in positive territory, while Asian markets finished higher overnight; the Nikkei Index recouped some of the week’s losses and China’s Shanghai Composite gained 0.4%, despite a dip in services sector activity. Elsewhere, the yield on 10-year Treasuries fell below 1.72% after finishing Thursday’s session at 1.81%, COMEX gold is spiking more than 2%, and WTI crude oil is pulling back.

Macro View

• Downshift underway. The May employment report was a clunker, as the economy added just 38,000 net new jobs in the month, well below the consensus expectation of a 160,000 gain. There is some evidence that the May number was pulled lower by the Verizon strike (35,000 workers) and by “payback” here in the spring after a warmer than usual winter shifted some jobs forward to earlier in the year. Wages (+2.5% year over year) and the unemployment rate (4.7%) were in-line with expectations, but overall the report was soft. While the Federal Reserve Bank (Fed) won’t ever react to one economic report, it’s clear that the odds of a Fed rate hike in June are now close to zero and a hike in July is just a coin flip. But despite the weak reading in May, the economy has created an average of 170,000 jobs per month in the past 6 months and 200,000 jobs per month in the past 12 months, more than enough to tighten the labor market and push wages and inflation higher. We continue to expect that job growth will slow into the 150,000 per month range by the end of 2016.

• Week ahead. A lunchtime speech by Fed Chair Janet Yellen in Philadelphia on Monday, June 6 will hopefully provide markets with the Fed’s assessment of the soft May jobs report and an update on the future path of rates. As is often the case the week after the jobs report, U.S. economic data are quiet next week; but China will begin to release its May dataset next week and there are several key reports due out in Japan as well, including the May Economy Watchers Survey. There are more than a half-dozen central bank meetings next week, including in Russia, Poland, Brazil, South Korea, New Zealand, and Australia, but the only change expected is a rate cut in New Zealand. Please see our Weekly Global Economic and Policy Calendar for details.

• Chinese services declined in May. The Caixin services sector Purchasing Managers’ Index (PMI) fell to 51.2 in May, down from 51.8 in April. Services matter greatly in China; they are key to the government’s effort to transform the economy from infrastructure investments to a more consumer-based economy. While still expanding, a slower rate of growth is not what the Chinese are hoping to achieve. Chinese equities were positive overnight, though the yuan remains near its five-year low.

• U.K. services expanded slightly, overshadowed by Brexit vote. U.K. services, as measured by the PMI, rose to 53.5, up from a three-year low of 52.3 in April. The data suggest that the U.K. economy will expand very marginally during the second quarter. Of firms surveyed, 37% said that the possibility of Britain leaving the European Union has been detrimental to business, with 9% reporting a “strongly detrimental” impact.

• Above 2,100, now what? The S&P 500 closed above 2,100 yesterday for the first time since April. As we noted on the blog yesterday, this area has been strong resistance the past year-and-a-half. In fact, it hasn’t made it three straight days over this level since last November, and July before that. Lastly, yesterday was just the third close above this level so far this year, after 67 closes above this point in 2015. Add it all up and this level is a very significant area of resistance.

• Can the Nasdaq make it eight in a row? The Nasdaq gained for the seventh consecutive day yesterday. Should it finish green today, that would mark the first eight-day win streak since February 2015. That streak made it all the way to 10 straight wins. A very interesting stat regarding the Nasdaq win streak is the past eight times it was up seven days in a row, it also gained on the eighth day.

• Broad-based participation is a good thing. One big bullish point is the very strong participation in this rally. One way to measure this is by looking at various advance/decline lines for indexes. This is a simple computation of how many stocks are up or down for the day in an index, and it is tallied on a cumulative basis. Yesterday, new all-time highs were made on the S&P Mid Cap Index, the NYSE, the S&P Small Cap Index, the S&P 100 Index, and the S&P 500 Index. In other words, there are various stocks of all shapes and sizes participating in this rally. Today on the blog we will take a closer look at this development.

Monitoring the Week Ahead

Friday

• Employment Report (May)
• ISM Non-Mfg. (May)
• Evans (Dove)

Sunday

• Mester (Hawk)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

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Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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