After Month In Red, Stocks On A Roll Despite Trade Fears As Jobs Data Loom

After two days of strong buying interest that gave the S&P 500 Index (SPX) a nearly 3% boost since Monday’s close, it might be interesting to see if stocks can keep up the momentum and power to a higher weekly finish. 

If that happens, it would be the first positive week since April. One thing that might help determine how the week finishes is Friday’s May payrolls report. Analysts expect jobs growth of 170,000, according to Briefing.com, down from the impressive 263,000 jobs added in April but still not far off the long-term average. Average hourly earnings are seen rising 0.3% from a month earlier, Briefing.com said, compared with a 0.2% rise in April. 

One thing to consider watching in the report is manufacturing and construction jobs growth, especially considering some of the data from those sectors haven’t looked too impressive lately.

Depending on how it turns out, the jobs report might either help solidify ideas of a possible near-term Fed rate cut or argue against it as the next Fed meeting approaches June 18-19. However, the Fed considers all sorts of data, so even a really bullish or bearish number isn’t likely to be the deciding factor. You can never say never, though. June is the third anniversary of the Fed looking at a disappointing jobs report and deciding against raising rates later that month, something that had been widely expected in the market before the payrolls data hit.

Early Thursday, the European Central Bank (ECB) stuck with dovish expectations by keeping rates unchanged and hinting there wouldn’t be a hike until next year. European stocks appeared to get a boost. Meanwhile, back here in the Americas, concerns about trade with Mexico and China continue to sizzle as President Trump delivered more threats aimed at China and reported lack of progress on Mexico talks, but the stock market had a positive tone despite that.

Good Times/Bad Times

There are times when good news on the surface isn’t so good underneath. When Fed leaders hinted Tuesday they might be willing to lower interest rates to help keep the economic momentum going, it implied that the Fed may keep money cheap and be inclined to make rate cuts. That’s what the market wanted to hear, and it backs up the probabilities of lower rates. But people sometimes forget that rates usually don’t come down for good reasons.

The tariff situation is only one reason for a potentially more dovish Fed. Brexit’s still in the wings, U.S. Treasury yields remain heavily inverted, there’s been no resolution to the U.S. spat with Mexico, and some of the economic data this week haven’t been so hot. Early Wednesday a private firm reported soft jobs growth in May, though we have to wait until tomorrow for the official government number. 

Though data from the private firm doesn’t always correlate with the government data, it was apparently enough to help put more pressure on 10-year Treasury yields early Wednesday, though they eventually bounced back. The 10-year yield now sits near 2.10%, compared with 2.33% for three-month yields. This is an unusual situation, and in the past has sometimes occurred ahead of recessions. Usually longer-term Treasuries pay investors a higher yield, enticing them to put their money away for more time, but when economic fears rise and people start piling into fixed income, that often means more pressure on long-term bonds, causing their yields to fall below near-term ones.

Anyone excited about a Fed rate cut possibly helping pump up the economy might want to keep things in perspective. With unemployment at 50-year lows and growth already above 3%, it’s questionable how big an impact a 25-basis point cut or even two of them can have. That’s something we might have to just wait and find out, assuming it happens.

Another thing to wait for is June 10, the date when President Trump has threatened to slap tariffs on Mexico. It’s not a one-way street, either. Mexico has threatened counter-measures against the U.S., and many U.S. companies have expressed concern about possible ramifications. Automakers are expected to be especially hard hit. This, along with the China situation, could limit attempts to take stocks back toward their April highs. Trump again threatened on Thursday to put tariffs on $300 billion more worth of goods from China, but it’s unclear if he’ll actually go through with it. 

Energy Sector Missed Party This Week

From a sector perspective, just about everything has been climbing this week, with the exception of Energy. The crude market plunged to its lowest level since January on Wednesday after a big build in U.S. stockpiles (see more below). OPEC members are squabbling about the date of their next meeting, now scheduled for June 25. There’s a proposal to move that back to early July, but Iran opposes the delay, Reuters reported. With crude now in a bear market—down 20% from recent highs—it’s hard to see the organization deciding to let more product flow into tankers. Lower energy prices also weighed recently on the small-cap Russell 2000 Index (RUT), which fell slightly Wednesday.

Moving away from Energy, which is typically a commodity-led market,  strength this week has been notable in some of the more cyclical sectors like Financials, Industrials, and Info Tech. Despite that, FAANG and semiconductor momentum kind of fizzled out Wednesday. There’s still a lot of concern about antitrust and privacy issues for FAANGs, and China tariffs and oversupply for semis (see more below).

However, two of the biggest Info Tech stocks are looking stronger this week, with Apple Inc. AAPL and Microsoft Corporation MSFT building on Tuesday’s gains. Some analysts have said software companies might have a bit more protection against the tariff battle, and AAPL got a boost this week when it said it wasn’t being targeted by China. A solid earnings report from Salesforce.com, Inc. CRM gave that stock a 5% boost Wednesday.

Debt Clock Ticks: With the world full of uncertainties lately, one of the question marks that people might normally watch has gotten swept under the rug a bit. The U.S. hit its “debt ceiling” back in March, but the government can probably keep operating without raising it until around September, economists say. If there’s wrangling between the White House and Congress on this issue, another government shutdown can’t be ruled out. This is one of those things that might remain in the background as long as bigger fish like Mexico and China tariffs are frying but it’s still there and might not get vacuumed away anytime soon.

Crude Correlation?: U.S. crude prices were already at three-month lows even before Wednesday’s weekly U.S. government supply report, and the data put new pressure on the commodity as stocks rose more than expected. Rising crude stocks can sometimes be a worrisome sign for the economy, signaling possible soft demand. While it’s not necessarily the best idea to equate numbers just because they come out the same week, ISM manufacturing data for May and construction spending for April both missed analysts’ consensus expectations. Also, factory orders fell in April and got revised down for March, all of which, along with crude stocks, could play into the story of a possible slowing economy. 

As for U.S. crude stocks, they reached the highest level since July 2017, while production stayed at record highs above 12 million barrels a day. It could be interesting to check the weekly oil rig count Friday to see if U.S. producers are scaling back production due in part to the recent price weakness.

SOX Vs. FAANGs: In the battle to the bottom between the semiconductors and FAANGs over the last month, FAANGs were the winner (or loser, depending on how you look at it). The Philadelphia Semiconductor Index (SOX) fell 13% between early May and early June, which sounds bad unless you consider that FAANGs fell 16% over the same time frame. There’s no real secret why both sectors got hit much harder than the overall market (the S&P 500 Index is down 4%). China trade worries drove both sectors down, but the question moving ahead is which one has the better chance for a quick recovery? So far, it’s a tie, with both sectors up just over 4% since their monthly lows posted in late May.

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