Non-Farm Payrolls Sink the Rally (June 3 Market Recap)

Non-Farm Payrolls Sink the Rally (June 3 Market Recap)

Non-Farm Payrolls Sink the Rally 

Indices 

• Dow 32,899 (313) or (0.94%) 
• Nasdaq 12,012 (119) or (0.98%) 
• S&P 4,108 (50) or (1.2%) 
• USD10Y 2.957% +21.4bp or +7.8% 

Non-Farm Payrolls 

The market was heading for consecutive positive weeks for the first time in the last seven when the Non-Farm Payrolls number hit the tape on Friday morning. Despite a “goldilocks” number which beat expectations (which should have quelled fears of a possible recession) but was substantially worse than last month’s print (which should have quelled inflationary concerns), investors, perhaps spooked by hawkish comments from Fed Vice Chair Leal Brainard and Cleveland Fed President Loretta Mester, sold markets aggressively to finish the week squarely in the red. 

The Fed Strikes Back 

The working hypothesis of this blog for quite some time has been that inflation is receding, the economy is slowing, and the Fed should pause rate hikes in the fall (the September meeting will be the next meeting after the June and July meetings). As mentioned above, Fed Vice Chair Brainard said in an interview on Thursday that it was difficult for her to foresee a situation in which the Fed would pause rate hikes. On Friday, Cleveland Fed President Mester essentially reiterated Brainard’s talking points with a slight shift saying that if the data demonstrated that the rate hikes were having a cooling effect on inflation that she could see the Fed only raising rates in the fall by 25 bp rather than another 50bp hike. All in all, it was a fairly hawkish week for the Fed, firmly pushing back on the “pause” hypothesis promoted here and elsewhere in the financial press. 

Going Down with the Ship 

The above notwithstanding, the economic data still supports that a “soft landing” is in play and that a “fall pause” is still a possibility. This week the economic data was as follows: 

• May Chicago PMI beat 60.3 vs expectations and was higher month over month (MoM). INFLATIONARY 
• May Consumer Confidence beat expectations but was lower MoM. DEFLATIONARY 
• May S&P Global U.S. Manufacturing PMI (final) missed expectations and was lower MoM. DEFLATIONARY 
• May ISM Manufacturing Index beat expectations and was higher MoM. INFLATIONARY 
• The April Job Openings and Labor Turnover Survey (JOLTS) was in line with expectations but fell sharply MoM. DEFLATIONARY 
• Jobless claims were lower than for the second consecutive week at 200,000 claims and continuing claims fell to another multi decade low. INFLATIONARY 
• The May ADP employment report missed expectations. DEFLATIONARY 
• April Factory Orders were down sharply MoM. DEFLATIONARY 
• May Non-Farm payrolls beat expectations but were down 10.5% MoM. NEUTRAL 
• The Labor Participation Rate ticked up slightly. INFLATIONARY 
• May S&P Global Services PMI (final) missed expectations and was down MoM. DEFLATIONARY 
• May ISM Services Index missed expectations and was down MoM. DEFLATIONARY 

In another deflationary development, June marks the first month of “Quantitative Tightening” whereby the Fed will allow $47.5 billion of Treasury and Agency mortgage-backed bonds to mature and roll off its balance sheet. Maturities in excess of $47.5 billion will be reinvested. The $47.5 billion cap will be increased to $90 billion in 90 days as the Fed attempts to decrease its $8.9 trillion balance sheet. This should have the effect of tightening the money supply and push rates higher as a large Treasury buyer (the Fed), is removed from the marketplace. 

May Core CPI is due out on Friday and will be another huge piece of data in the inflationary puzzle. As noted last week, Core CPI year to date (YTD) is running at a 6% annualized rate, much lower than the headline 8.3% year over year (YoY) print from April. Expectations are for a +0.5% MoM increase (which would keep the 6% YTD annualized number intact) and +5.9% YoY.  

Covid Update 

Despite reports of rising infections and the reintroduction of indoor mask mandates here in Alameda County, it appears that the Omicron BA.2 variant has burned itself out. Infections are declining, the increase in the death rate never rose anywhere close to the rate of increases in infections and hospitalizations, and the expectation is that hospitalizations will now begin to decline as well. As of this week’s blog post, the Covid Update will be retired unless conditions worsen substantially. 

Covid 14-Day Daily Moving Averages 

Last Week
Infections	110,084	+26%
Hospitalizations	26,110	+29%
Deaths	358	+12%

 

This Week
Infections	101,348	-3%
Hospitalizations	27,940	+17%
Deaths	281	-7%

Next Week 

The economic calendar is extremely light next week. The key report is Friday’s Core CPI report. Anything below April’s 8.3% YoY number and +0.3% MoM number will be met with a bullish response from the markets. Numbers greater than those will provoke another slide. 

Market Data Points Next Week 

• Monday – N/A 
• Tuesday – N/A 
• Wednesday – N/A 
• Thursday – Initial Jobless Claims.  
• Friday – May Core CPI (+0.5% MoM, +5.9% YoY), June University of Michigan Consumer Sentiment (prelim). 

June 03 Trading Recap… 

Monday – U.S. Markets Closed in Observance of Memorial Day. 

Tuesday – Dow (222) to 32,990, Nasdaq (49) to 12,081, S&P (26) to 4,132, USD10Y +10.1bp to 2.844% 

• Nine of eleven S&P sectors traded down today, led lower by Energy, Materials, and Utilities.  
• July WTI Crude spiked on news of a European partial ban of Russian oil but then fell back to below Friday’s close to settle at $114.72/bbl. 
• Salesforce (CRM) beat earnings and revenue expectations, boosted 2022 earnings guidance but reduced 2022 revenue guidance citing the strength of the U.S. dollar. The stock traded up 9.21% after hours. 
• The March S&P Case Shiller National Home Price Index rose 20.6% year over year (YoY). Home prices were up 3.5% month over month (MoM). 
• The FHFA March Home Price Index was up 19% YoY and 1.5% MoM. 
• May Chicago PMI rebounded to 60.3 vs expectations of 55.9 and last month’s 56.4 print. 
• May Consumer Confidence beat expectations but was lower compared to April’s number (106.4 vs 103.9 expected and April’s 108.6). 

Wednesday – Dow (176) to 32,813, Nasdaq (86) to 11,994, S&P (30) to 4,101, USD10Y +8.7bp to 2.931%. 

• Ten of eleven S&P sectors traded down today led lower by Financials, Healthcare, and Consumer Staples. 
• May S&P Global U.S. Manufacturing PMI (final) missed at 57 vs expectations of 57.3 and vs April’s 57.5 print. 
• May ISM Manufacturing Index beat expectations at 56.1% vs 54.5% and last month’s 55.4%. 
• July WTI Crude traded up again before settling nearly unchanged at $114.79/bbl. 
• The April Job Openings and Labor Turnover Survey (JOLTS) was in line with expectations with 11.4 million openings but fell sharply from last month’s upwardly revised 11.85 million openings. 
• Jaime Diamond, CEO of JPMorgan Chase (JPM) said a hurricane was approaching the U.S. economy despite positive comments made on the same subject just last week. 
• This month marks the first month of “Quantitative Tightening” whereby the Fed will allow $47.5 billion of Treasury and Agency mortgage-backed bonds to mature and roll off its balance sheet. Maturities in excess of $47.5 billion will be reinvested. The $47.5 billion cap will be increased to $90 billion in 90 days as the Fed attempts to decrease its $8.9 trillion balance sheet. 

Thursday – Dow +435 to 33,248, Nasdaq +322 to 12,316, S&P +75 to 4,176, USD10Y (1.8bp) to 2.913%  

• Ten of eleven S&P sectors traded higher today led by Consumer Discretionary, Materials, and Communication Services. 
• Jobless claims were lower than for the second consecutive week at 200,000 claims vs 210,000 expected and last week’s slightly revised higher 211,000 print (originally 210k). Continuing claims fell to a 1969 low of 1.31 million from last week’s 1.34 million.  
• June WTI Crude traded up to $117.40/bbl despite an agreement from OPEC to increase crude supplies in July and August. 
• Microsoft (MSFT) cut its fourth quarter earnings and revenue guidance citing the strong dollar. 
• The May ADP employment report missed badly, showing an addition of 128,000 jobs vs 299,000 expected and last month’s 202,000 print. 
• April Factory Orders were down sharply MoM; +0.3% vs +0.6% expected and vs March’s +1.8% print. 
• Fed Vice Chair Lael Brainard said it was difficult for her to imagine a case for pausing interest rate hikes. 

Friday – Dow (348) to 32,899, Nasdaq (304) to 12,012, S&P (68) to 4,108, USD10Y +4.4bp to 2.957% 

• Ten of eleven S&P sectors traded down today led lower by Consumer Discretionary, Technology, and Communication Services. 
• July WTI Crude jumped 2.9% higher and closed at $120.26/bbl.  
• May Non-Farm payrolls added 390,000 jobs vs 328,000 expected and vs April’s 436,000 report. Despite the decline MoM, the investors viewed this as inflationary, and markets sold off.  
• The Labor Participation Rate ticked up slightly to 62.3%, which is still down 1.1% from the pre-pandemic high in February of 2020. 
• May S&P Global Services PMI (final) missed expectations at 53.4 vs 53.5 and last month’s print of 53.5. 
• May ISM Services Index missed at 55.9% vs 56.7% expected and April’s 57.1% print. 

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