An “I” for an “I”: Inflation, Infrastructure Loom Large with Market Near Record High

The week begins with focus turning to Washington, where infrastructure negotiations continue. Thursday’s consumer price index for May looms large, but some Fed tapering fears appeared to ease after Friday’s jobs data.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/bears out: selloff picks up steam
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Key Takeaways

  • With jobs report out of the way, consumer price data later this week in focus

  • Keeping an eye on Washington as infrastructure talks continue

  • Volatility, bond yields both near recent lows after jobs report eased rate fears

(Monday Market Open) After stocks came within inches of a new record high on Friday following the “Goldilocks” May jobs report, the new week starts with investors mulling inflation, infrastructure talks, and an up-and-down Tech sector. 

The consumer price index for May due Thursday and infrastructure legislation in Washington take the spotlight this week. Progress on that legislation could potentially give the Materials, Energy, and Industrial sectors a boost, while the inflation data might give investors more clues about the state of the economy following last week’s payrolls data. 

With all this to think over, the market barely moved overnight in pre-market trading and looks a bit flat to start the week. Even the volatile commodity markets are mostly treading water this morning, and so are bonds. 

Friday’s high of 4233 for the S&P 500 Index (SPX) put it just five points away from the all-time peak posted a month ago today. Breaking through that 4238 barrier and closing above it in any sort of meaningful way might be what the SPX needs to crack open the narrow trading range it’s been in since early April, marked by relatively light daily moves. Overall, the SPX hasn’t traded below 4056 or above 4238 over the last two months. That’s a range of just 4% of the average SPX value for that time frame.

Some of the fear that haunted Wall Street ahead of the jobs report seems to have dissipated. You can perhaps see that in the Treasury market, where the 10-year yield fell back toward recent lows to finish Friday near 1.55%, not far from long-term support that technical analysts see at 1.52%. It’s at 1.57% early Monday. Volatility also fell on Friday. 

Tech Back in Favor? Jobs Report, Apple Conference Appear to Boost

Meanwhile, the relationship between Wall Street and Tech stocks lately is like a teen-age love affair. All smiles and hugs one day, ignoring each other the next. 

Friday was another case of market puppy love for Tech after the jobs report appeared to lower the chance of a near-term Fed tapering its monetary stimulus. A tapering, if it happens, could mean higher Treasury yields, which often hurts growth stocks like some in the Tech sector. 

A bit of Friday’s Tech strength might also have come in anticipation of this week’s Apple (AAPL) Worldwide Developers Conference (WWDC). Things kick off this morning with a speech from AAPL CEO Tim Cook.

WWDC is the venue Apple uses to reveal the next operating system for the iPhone. iOS 15 will likely be the most important software update to come out of the conference, Tech publication Wired noted. So consider keeping an eye on anything coming out of that conference this week if you want more direction on where Tech might go from here. AAPL hasn’t performed well so far this year, but you can’t overlook its $2.1 trillion market cap and the impact that can have on broader indices. 

Tech gains Friday took a lot of their momentum from the semiconductor sub-sector, which rose nearly 2.5%. It may feel like the Philadelphia Semiconductor Index (SOX) has done nothing but rise this year, but it actually treaded water much of the time and is up about 12% year-to-date, right about even with the SPX. The usual suspects like Nvidia (NVDA), Advanced Micro Devices (AMD), and Intel (INTC) helped chips finish last week with a boom, but we’ll see if investors continue to show the same appetite in coming days. 

Another stock in the spotlight today is Biogen (BIIB), which awaits an FDA decision on whether to approve BIIB’s Alzheimer’s disease drug. The stock moved higher in pre-market trading, but an FDA advisory panel of outside experts has recommended against approval, and the FDA usually follows its panels’ advice. This might be an interesting one to watch. 

Dollar, Volatility Finished Old Week Weak

They weren’t showing much appetite for the dollar going into the weekend, as the U.S. Dollar Index ($DXY) fell back near its psychological support level of 90. Earlier last week the dollar had started moving higher, perhaps on hopes of a major jump in U.S. May jobs growth. The dollar got a bit firmer early Monday but it’s nothing to write home about. 

The jobs growth number of 559,000 was solid but not eye-popping, and didn’t exactly scare the children, so to speak, about the chance of any near-term Fed stimulus tapering. That may be why the dollar stepped back a bit even as the stock market kicked into higher gear to end last week. Remember, the dollar tends to be inversely correlated to commodity prices. Weakness in the greenback could provide more ammunition for crude futures, which already are the highest in seven years. 

As stocks inch toward record highs, another metric keeps losing ground. Volatility, represented by the Cboe Volatility Index (VIX) dropped below 17 on Friday after a failed test of the 20 level earlier in the week. With Friday’s jobs report possibly reducing tension a bit around possible Fed tapering, it’s conceivable VIX might stay lidded. On the other hand, there’s always a chance it could get a jolt, whether it’s from the consumer price index (CPI) data due out later this week or any Fed comments. 

As for the Fed, their pre-meeting quiet period is approaching. Focus is likely to turn toward next week’s Federal Open Market Committee (FOMC) meeting June 15-16, but the CPI data looms large ahead of that.

Delving Deeper into Jobs Data

Looking back once more at last Friday’s jobs report after a weekend of perspective, the headline number of 559,000 jobs created in May came in a little light, but the market seemed to like it because it potentially takes some of the inflationary pressure off. 

Based on the numbers we saw, it’s unlikely that the narrative we’ve had over the last month really changes. That means every piece of news from the Fed or anything we think implies something the Fed is doing leads to this tug of war of value vs. growth vs. fixed income. It’s probably not changing much over the next month. 

Meanwhile, even though crude has been on a pretty incredible tear, a lot of the other commodities have at least leveled off a bit. They’re not on quite the tear they once were, so that could also be taking inflationary pressures off the table. 

Memes, Earnings, and More: The Week Ahead

Looking ahead this week, we have Thursday’s consumer price index (CPI) front and center, along with expected earnings from Chewy (CHWY) and GameStop (GME). We’ll talk more about CPI tomorrow. The so-called “meme” stocks like GME and AMC Entertainment (AMC) remain in focus after both eased slightly on Friday. It was actually kind of surprising not to see double-digit moves for either after so much drama earlier last week. 

Anyone thinking of dipping their toe into any of these meme stocks should remember that elevated volatility means elevated risk. Now more than ever, have a plan for your trading and plan your risk before the trade. 

That goes for any trades, even beyond the most volatile stocks. We’re approaching mid-year, so it’s not too early for long-term investors to start thinking about examining their portfolios to see what’s working and what’s not so far in 2021. Also consider fixed income vs. stock market exposure. What you see now might not match the plan you started the year with, so check and see if any adjustments need to be made and if you remain adequately diversified.

philadelphia semiconductor index

 CHART OF THE DAY:  CRUDE WAY OUT IN FRONT. The crude market (/CL—candlestick) remains on a tear, closing in on $70 a barrel as travel demand continues to rise. Other commodities ($BCOM—purple line), aren’t keeping up, as this year-to-date chart shows. They’re up just 19% so far in 2021, compared with nearly 47% for crude. A softening dollar could help inject further strength into crude and other commodities if it continues. Data Sources: Bloomberg, CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Re-Constructing Jobs: One interesting point some analysts didn’t pick up about the May payrolls data came in the construction sector. While overall construction jobs fell by 20,000, 17,000 of those losses were non-residential specialty trade contractors, a business very subject to small changes in timing of various construction projects. 

It’s not really something that plays out as a trend. Instead, it probably reflects various jobs starting and stopping for various reasons, and a lot of those people could have been hired back after the government stopped tracking data for the report. Keep an eye on the June construction job numbers to see if that’s reflected, or if the May number gets revised upward. 

It’s stuff like this that makes these reports kind of a snapshot in time, which is why investors should consider tracking data over longer periods to see where all the different puzzle pieces fit. 

A Fed President’s Take on Jobs/Inflation: Cleveland Fed President Loretta Mester, interviewed Friday on CNBC after the jobs report, didn’t say anything that could really be seen as too hawkish, pointing out that the job market still has a long way to go from recovering in the post-Covid era and that the Fed needs to continue watching data. She cast the Fed’s current role as being “deliberately patient.” 

Mester doesn’t necessarily believe higher wages are leading to higher prices in some sort of inflationary spiral, as some analysts have feared. It’s something to monitor, Mester said, but she sees no signs of it yet. “At this point, I don’t think we’re anywhere near there,” she told CNBC. “This increase in wages is definitely happening…but it’s not feeding into underlying inflation yet.” Thursday’s consumer price index report for May is the next key read on the inflation picture. 

Second-Half Musings: Though some major investment firms have suggested stock market growth might be muted in the second half, at least one research firm recently raised its projections for full-year market progress. Some analysts remain optimistic that the market can again push higher before the end of the year. Research firm CFRA now has an end-of-the-year estimate for the SPX of 4620, representing about a 9% projected price appreciation from Friday’s level. This forecast, CFRA said, incorporates historical precedent, fundamental forecasts, and technical considerations. Sectors with the lowest forward P/E ratios, according to CFRA, include Financials, Health Care, and Utilities. Could more investors pile into these sectors looking for relative bargains? As with everything, only time will tell.

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • With jobs report out of the way, consumer price data later this week in focus

  • Keeping an eye on Washington as infrastructure talks continue

  • Volatility, bond yields both near recent lows after jobs report eased rate fears

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