An enormous jobs report looms within the week forward, as markets enter the often-weak month of June

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

NYSE

May’s employment report is the big event for the week ahead as stocks enter the often weak month of June. Stocks ended May with mixed performance. Big cap indices like the S&P 500 and Dow saw gains. The S&P rose half a percent and the Dow rose 1.9 percent. The small cap Russell 2000 was flat, up 0.1%, and the tech-heavy Nasdaq was down 1.5%.

June is not a strong month for stocks historically. The bespoke investment group points out that the Dow was up 0.12% in June over the past 50 years and was positive 52% of the time.

However, over the past 20 years, June has been far weaker, only winning 40% of the time. June performance is tied to September as the worst month of the year, with an average Dow decline of 0.7%, according to Bespoke.

The economy will be the focus for the coming week with the key ISM metrics on activity in manufacturing and the service sector. The most important measure, however, will be Friday’s employment report. According to the Dow Jones, economists expect Friday’s employment report to show around 674,000 job creation in May after the disappointing 266,000 jobs added in April. That was about a quarter of what economists expected.

“You know, if we fail to meet job expectations for two months in a row, the market gets nervous,” said George Goncalves, head of US macro strategy at MUFG. “Hopefully we did it and then it gets a positive response and we go to the Fed meeting and then we say, ‘Hey, the economy is still on the right track.'”

Big June event

The Fed will meet June 15-16, and market professionals are already expecting it to be the most important event of the month. Fed officials have insisted that if they see signs that the economy is truly healing, they will keep politics simple. They also claim that higher inflation readings are temporary as the data is compared to a weak period in the past year.

What matters to markets is whether the Fed is starting to believe that inflation is higher than expected or that the economy is strengthening enough to move forward without that much monetary support. Fed officials said they would consider reducing their quantitative easing bond purchase program if they see signs of improvement, and that would be a first step towards rate hikes that is not expected until at least 2023.

When inflation is too high, the Fed’s main weapon is to raise interest rates.

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

The next big read for the economy is Friday’s Employment Report, and it’s great as recent inflation readings have been much hotter than expected. The price index for personal consumer spending was on Friday at the latest. It showed core inflation of 3.1% yoy, the strongest reading for this measure since 1992.

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

Inflation spurt

The Fed has announced that it will tolerate an average inflation range around its 2% target until inflation stays at a higher level. Before the last figures, inflation was mostly below 2%.

“With the PCE number rising like any other inflation number over the past six weeks and hotter than expected, the market is getting closer to the Fed’s demand that inflation be temporary,” said Julian Emanuel, head of equities and derivatives strategy at BTIG .

Emanuel said speculative activity on meme stocks this week was a sign of froth and showing a large amount of liquidity in the hands of investors. One of those stocks, AMC, closed 1.5% on Friday after rising 116% last week, up 1,200% in 2021.

“The net-net at the index level is basically a stock market that is moving sideways,” said Emanuel. “We continue to believe that on the longer term this is a bull market that started in March last year and must continue to run. If you look at it over the medium term, the market has every right to be concerned and we believe so that they will heighten their concern that the Fed is not paying enough attention to price stability. “

Emanuel said he looked into what happened to stocks when the core PCE was above the Fed’s 2% target. “The median monthly return for months when core PCE has been above 2% since 1989 is (down) 1.6%, with a decided bias towards more defensive sectors like healthcare outperformance and a very strong bias towards technology.” by all kinds to subpar, “he said.

Technology stocks, as measured by the S&P information technology sector, rose 1.6% last month and are up 5.9% year-to-date. The sector is lagging behind the S&P 500’s 12% gain.

The top performing sectors so far have been cyclical: energy up 36.2%, finance down 28.5%, materials up 20.1% and industry down 18.3%. Communications services, which include some names for Internet growth, are up 16% year-to-date. Healthcare has outperformed information technology and is up 8.6% year-to-date.

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

Red flag?

On the fringes of the financial markets, market professionals watch out for signs of an enormous surge in liquidity in the financial system. Over the past week, the institutions have placed unprecedented amounts of money with the Fed, almost half a trillion dollars on Thursday.

“There is far too much liquidity in the system and this is due to the continued QE from the Fed, but also because of the disbursements from the fiscal stimulus,” Goncalves said.

He said the funds from trillions of incentives, including those for state and local governments, have not yet been spent but have found their way into the banking system. At the same time, institutions and individuals continue to convert funds into money market funds, currently holding around $ 4.6 trillion.

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

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

“Institutions are reposing cash with the Fed because they don’t have enough bills or short-term commercial papers. There aren’t enough fixed income assets to get around,” Goncalves said. He said banks don’t want to hold the excess cash either, as it counts against their leverage ratio and they would prefer to find other investments with higher yields.

What it has done has sparked some speculation that the Fed would curtail its QE program sooner than expected, he said.

Calendar for the week ahead

Monday

Memorial Day holiday

Tuesday

Merits: Canopy growth, Hewlett Packard Enterprise, Ambarella, Zoom Video

9:45 am Manufacturing PMI

10:00 am Randal Quarles, vice chairman of the Fed

10:00 am ISM production

10:00 a.m. construction costs

2 p.m. Fed Governor Lael Brainard

Wednesday

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

Vehicle sales

8:15 am ADP employment

12:00 noon Patrick Harker, Philadelphia Fed President

2.00 p.m. Beige book

2:00 pm Raphael Bostic, President of the US Federal Reserve in Atlanta, Charles Evans, President of the US Federal Reserve in Chicago, Robert Kaplan, President of the US Federal Reserve in Dallas

Thursday

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

8:30 am Initial jobless claims

8:30 a.m. Productivity and Costs

9:45 a.m. Services PMI

10:00 am ISM Services

12:30 p.m. Bostic from Atlanta Fed

1:00 p.m. Dallas Fed Chaplain

1:50 p.m. Harker of the Philadelphia Fed

3:05 p.m. Quarles, vice chairman of the Fed

Friday

7:00 am Fed Chairman Jerome Powell on central banks and climate change

8:30 a.m. employment

10:00 a.m. factory orders

Comments are closed.