Biding Time: Investors Appear To Keep Powder Dry Ahead of Friday’s Jobs Report

With a holiday weekend coming up, we could see volumes tapering as the week goes on. But the week ends with the monthly payrolls report. Investors may want to consider keeping their positions tight by trading smaller and closely monitoring riskier trades.

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Key Takeaways

  • Trading volumes could taper as we head toward holiday weekend
  • Biggest event of the trading week looks to be employment situation report on Friday
  • Investors likely to scour wage data in jobs report to check in about inflation

(Monday Market Open) Without any major economic data this morning, it seems like investors may be biding their time for guidance from numbers out later in the week, including the big government jobs report on Friday.

With the S&P 500 Index (SPX) in record territory and movement on a potential infrastructure bill out of Washington it doesn’t seem like that bad a place to just hang out until we get some additional pointers from economic reports later in the week.

Based on futures activity, one place that’s seeing a little more action is tech and growth stocks, probably because the yield on the 10-year Treasury is pulling back a bit. The Cboe Volatility Index(VIX) is up a bit but is under 16, so it doesn’t appear that too many jitters are plaguing the market. 

With a holiday weekend coming up, we could see volumes tapering as the week goes on. But of course there’s the big event on Friday with the jobs report. So investors may want to consider keeping their positions tight by trading smaller and closely monitoring riskier positions.

One reason the employment report on Friday is so important is that it will give us a fresh glimpse at what wages are doing. We’ve already seen commodities prices moving higher, so it could be interesting to see what wage data tells us about inflation.

Inflation Not Looking So Scary

The final trading day of last week saw the SPX notch another closing record high as the market apparently continues to buy the Fed’s analysis that the spike in inflation won’t last long. 

Even though prices are on the rise, investors may still be thinking the Fed won’t start tightening policy anytime soon—first because the central bank seems to believe runaway inflation isn’t going to be an issue and also because policy makers have built in some cushion with their shift to inflation averaging.(See more on inflation below.)

The inflation data out Friday helped boost the yield on the 10-year Treasury and steepen the yield curve, helping the Financials sector lead the SPX higher. The reflation trade also got some help as investors mulled a bipartisan infrastructure deal, and positive stress test results were also a boon for the Financials sector.

Growth stocks didn’t do so great on the inflation news as expectations for higher prices tend to hurt their present valuations.

Mark Your Calendars

There isn’t any major domestic economic data on the calendar for today. Tomorrow, the market is scheduled to see a couple of housing market price indexes for April as well as June consumer confidence numbers. A Briefing.com consensus is expecting consumer confidence to increase to 120 from 117.2.

Wednesday brings data on mortgage applications, the ADP employment report, Chicago area manufacturing data and pending home sales. It’s also the end of the second quarter on Wednesday, which sometimes can cause a little volatility as some traders and investors do a little position shifting.

Thursday’s calendar includes initial jobless claims, the ISM manufacturing index, and construction spending data. Initial claims jumped back above the 400,000 mark earlier this month, so the market would probably take it as a good sign if we can get back below that figure.

And of course Friday is the day of the big monthly government jobs report. A Briefing.com consensus is calling for nonfarm payrolls to rise by 680,000 in June, an acceleration from the prior month’s 559,000. Beyond the headline number and what it tells us about the state of the economy, investors are probably also going to be scouring the report to see if there’s anything in there that might change the Fed’s narrative about economic progress, which could shed light on its thinking about when it might start tightening monetary policy.

philadelphia semiconductor index

CHART OF THE DAY: NOT THAT HIGH. The 10-Year Treasury Note Yield Index (TNX—candlestick) rose on Friday as data showed rising inflation and investors mulled progress on a potentially reflationary infrastructure package. But the yield is still around 1.5%, under the 1.7% area we saw earlier in the year. That arguably leaves stocks in a pretty good position of not having too much competition for yield even as the Treasury market doesn’t seem to be factoring in runaway inflation. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Peak Inflation?Last week, we saw that core personal consumption expenditure prices—the Fed’s preferred inflation gauge—increased 0.5% in May, a little less than the 0.6% consensus, while the year-over-year rise of 3.4% was the largest in quite a while. Yet the SPX still managed to notch another record. As we said on Friday, the yearly figure marks a comparison to when Covid lockdowns were in place and spending was light. But there also may be more to the market calm after such a number, especially when looking at some initial reactions after the data came out. “The inflation readings are eye-popping, yet the futures for the major indices went up in their wake while long-term bond yields barely moved,” Briefing.com said. “The seeming connection in those reactions is that this is at, or close to, peak inflation, meaning market participants are anticipating better inflation news in coming months.”

Guiding Light: As the second quarter heads toward the history books, more SPX companies than average have issued positive earnings-per-share guidance, FactSet said on Friday. Of the 103 SPX companies that have issued such guidance for the quarter, 66 have issued positive EPS guidance while 37 have issued negative guidance. The number of companies issuing positive guidance is well above the five-year average of 37 while those issuing negative guidance is well under the average of 63 over that time span. The Information Technology sector has the biggest number of companies issuing positive EPS and revenue guidance of all the 11 SPX sectors.

Raising the Roof: It seems that construction-related stocks stand to benefit from an infrastructure bill, progress on which was announced last week. But there appear to be other tailwinds helping this cyclical sector as well. “Apart from the infrastructure deal, solid first-quarter GDP and lower weekly jobless claims have been major motivating factors for investors,” according to Zacks Investment Research. “The construction market’s fate—which is tied to the broader economic scenario—is expected to be resilient.” 

Good Trading, 

JJ

@TDAJJKinahan

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

  • Trading volumes could taper as we head toward holiday weekend
  • Biggest event of the trading week looks to be employment situation report on Friday
  • Investors likely to scour wage data in jobs report to check in about inflation

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