Market Overview

OPEC Production Debate and European Rates In Focus Ahead of U.S. Jobs


One day before the U.S. May jobs report, attention turned overseas Thursday as Europe held rates steady and OPEC officials debated a possible output ceiling.

The S&P 500 index (SPX) entered Thursday nestled right under the psychological 2100 mark. In some respects, it’s surprising that it’s so close, considering that it was down sharply at one point Wednesday. The index crawled back late in the day, with seven of 10 sectors finishing positive. But the index still couldn’t break 2100 at the close.

European Central Bank (ECB) President Mario Draghi spoke at a news conference Thursday after the ECB left rates unchanged. The decision on rates matched expectations, but on a more interesting note, Draghi said he expects European interest rates to remain at current levels or lower for an extended period of time. The fact that he said “or lower” was somewhat surprising and points to a continued dovish approach. But Draghi’s words didn’t seem to move markets very much.

OPEC ministers met Thursday in Vienna, and oil futures were basically flat, though still on pace for gains this week. While anything is possible, expectations ahead of the meeting were for no action on setting a ceiling for output, mainly because Iran has been refusing to go along on that idea, according to media reports. There may not be much incentive even among other OPEC producers to set production limits. After all, the price of oil has almost doubled from its February low despite producers’ freedom to open the taps all they wish. The last time OPEC met and decided not to put caps on production, oil prices initially fell, but then quickly recovered, mainly due to production troubles in non-OPEC countries like Canada and Nigeria. So even if there’s no ceiling agreement, that isn’t necessarily an impediment to further gains in the futures market.

Back in the U.S., two Fed officials are scheduled Thursday. Federal Reserve Governor Jerome Powell speaks this morning, and Dallas Fed President Rob Kaplan speaks at 1 p.m. ET at a conference at Boston College. Federal Reserve Governor Daniel Tarullo said in an interview with Bloomberg TV Thursday that he’s in favor of a gradual approach to rate hikes but is in the camp of less hawkish officials at the Fed who think there needs to be an “affirmative” reason to move and aren’t sure a rate hike is necessary based on economic data.

Though it’s not necessarily predictive of the government’s jobs number, ADP reported early Thursday that private companies added 173,000 jobs in May, a little below the 175,000 estimate. What does that mean for tomorrow’s jobs report? Well, in April ADP reported 166,000 jobs created and the government’s number turned out to be 160,000. On another note, weekly U.S. jobless claims Thursday of 267,000 were right around expectations.

There was some disappointing news from the auto sector on Wednesday, as May auto sales came in at a 17.45 million seasonally adjusted rate, according to Autodata. That was slightly above expectations for 17.3 million, according to economists polled by Reuters. But that was down from last year’s sales of more than 18 million, and sales for the month of May were off 6% from a year earlier. Both General Motors Company (NYSE: GM) and Toyota Motor Corporation (NYSE: TM) reported sales drops last month. That’s certainly a change from April, when auto sales zoomed ahead, and raises some questions about whether sales may have peaked.

“M” Words Dominate Beige Book: The Federal Reserve’s Beige Book, released Wednesday afternoon, used a variety of “M” words to describe economic activity and consumer spending across regional economies. Favorite adjectives in the report, based on degree of usage, included, “moderate” and “modest.” The Fed used another “M” word to describe economic activity in the Dallas district, saying it increased “marginally.” And manufacturing activity was “mixed” across districts, the Fed noted. Not a lot of “S” words like “strength” to be seen, though another “s” word, “slowed,” was used to describe the pace of economic growth in the Chicago and Kansas City regions. The one key takeaway, once investors get past all the “M” words, is that the report noted a tightening labor market across many Districts and employers reporting difficulty finding suitable workers. Perhaps this helped contribute to what the Fed described as “modest” wage growth across many Districts, although wage pressure was “minimal” in the Dallas District.

Could Payroll Data Surprise? The consensus estimate for tomorrow’s May jobs number is on the low side at 155,000, which would be below the prior month’s sluggish 160,000. Some of the caution concerning May appears tied to a strike at Verizon Communications Inc (NYSE: VZ) that took 35,000 workers off the job during the month, and some analysts think the Verizon strike might mean a jobs number as low as 120,000. However, not everyone is expecting flat to weak jobs growth. For instance, estimates that 170,000 jobs were created last month, along with a 0.3% increase in hourly wages, up from a 0.2% rise in April. What arguments are there for better than expected job growth? For one thing, the Institute for Supply Management said Wednesday that its index of manufacturing activity rose to 51.3 in May, from 50.8 in April. Sometimes, manufacturing growth can lead to increased demand for workers, though, truth be told, the index is roughly flat year over year. Higher oil prices in May also might have boosted the energy industry, increasing payroll numbers there, and a weakening of the dollar last month may have raised overseas demand for U.S. products, another factor that can boost job growth. Could these factors combine for an upside surprise on Friday? We shall see.

Nasdaq Takes Pole Position in June: If history is any guide, it’s the Nasdaq index that does best in the month of June. Both the S&P 500 index and the Dow Jones Industrial Average (DJIA) have averaged slight losses in June since 1950, but the Nasdaq, tracked since 1971, has averaged a slight rise during the month, historical data show. All three indices typically rise in June during an election year, according to historic patterns. Recall that the Nasdaq is heavily weighted toward information technology companies, with technology making up more than 42% of the companies listed. It’s fun to look at historical data like this, but obviously every year is different and there are no guarantees. This June looks like it could be particularly volatile as expectations mount for a possible Fed rate increase in the middle of the month and ahead of the June 23 British “Brexit” referendum.

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