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Horsemen of Risk At Starting Gate As Focus On VIX, Gold, Bonds Ahead of Jobs Data

June 1, 2017

(Thursday Market Open) Ahead of key jobs data tomorrow, investors might want to watch the so-called “three horsemen of risk” later Thursday to see what expectations the market is building in.

Those “horsemen” are VIX, gold, and bonds. The jobs data are the last significant economic signal ahead of the Fed’s meeting June 13-14, and any sign of defensive trading today could indicate whether the market senses economic weakness that could potentially take the sails out of what now is around an 85% chance of a Fed rate hike. So watch those three to see if they start climbing toward the close, indicating worries of possible data weakness.

While some estimates put jobs growth for May as low as 170,000, others are more optimistic. For instance, research firm CFRA said Wednesday that jobs growth could reach 195,000, which wouldn’t be much lower than April’s big gains. The ADP data early Thursday showed private payrolls up 253,000, but ADP doesn’t always correlate with government data.

The Fed’s Beige Book observed labor shortages in some areas, so keep an eye on the hourly earnings component of tomorrow’s jobs data to see whether labor tightness translated into wage growth. If that happened, it could counteract some of the soft inflation talk (see below) that we’ve been hearing lately. Hourly earnings rose 0.3% in April, and the consensus for May is also 0.3%, according to a consensus of analysts compiled by

Though it ended with a whimper, May was another good month for the stock market. Every major index gained, and the S&P 500 (SPX) posted its best month since February. The Nasdaq has risen for seven-consecutive months. Stock futures pointed to a possible higher open Thursday.

Financial stocks didn’t join in the May festivities, and are now just clinging to gains for the year after another washout on Wednesday. A 0.8% slide made financials the weak link on the day and contributed to the second-straight session of losses for the overall market. Subtract financials and energy — which continues to sink amid weak oil prices (see below) — and it wasn’t that bad a day, with seven of the 11 sectors posting gains. Info tech and real estate were the other laggards.

The question is whether this financial sector chill might last, and if it might leak into the broader market. Some reasons cited for financial sector losses include a flattening yield curve, reports of lighter trading, and slowing loan growth. Long-term weakness in financials isn’t a good sign, because it can often point to issues with the economy as a whole. A couple of economic signals Wednesday certainly weren’t much to cheer about (see below), but one day’s data are simply that. Better data could always come today.

There’s other data before the jobs report, notably today’s auto and truck sales for May. Most of the big auto companies reported steep year-over-year sales drops in April, so we’ll see if that trend continued. Construction spending is another report worth watching, along with weekly oil stockpiles data. On the earning side, Lululemon (LULU) reports after the close.

Energy sector


While the S&P 500 Index (SPX), plotted through Wednesday on the thinkorswim® platform from TD Ameritrade, remains near record highs despite two days of losses, the energy sector (purple line) tumbled to new lows for the year amid oil’s continued downward grind. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Different Fed Messages On Inflation: Fed Governor Lael Brainard drew attention earlier this week when she said, "Currently I see more signs that progress on inflation is slowing than of a breakout of inflation to the upside,” according to media reports. “If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.” On the other hand, Fed Governor Jerome Powell said early Thursday that soft inflation is “transitory,” MarketWatch reported, and that strong spending and a tightening labor market will exert some upward pressure on wages and prices. Chances remain near 85% for a rate hike by the Fed’s June 13-14 meeting, futures prices indicate. But odds for another hike later this year have been falling and now sit at around 45%.

Mixed Picture: Wednesday’s economic data were mixed. Pending home sales fell 1.3%, dropping year-over-year for the first time since December. And the Fed’s Beige Book, while indicating continued economic firmness overall, said optimism had dropped in some districts and economic activity had “flattened out” in others. Ten-year Treasury yields fell and gold rose Wednesday, though both reversed direction early Thursday. On the positive side, Chicago PMI outdid expectations and rose from the previous month. The ISM manufacturing index bows later today.

Force Majeure? The energy and financial sectors both find themselves under pressure, partly from factors beyond their control. In energy, the obvious culprit is the price of oil, which, like a drowning man, keeps waving a hand above the $50 a barrel water line before sinking down into the $40s again. Heavy supply from both Libya and the U.S. helped push U.S. oil futures below $49 on Wednesday. The situation is a little more complex for the financials, as a number of factors play a role in the sector’s weakness. Both JP Morgan (JPM) and Goldman Sachs (GS) said Q2 trading has slowed significantly, a particularly rough sign for GS since its trading declined in Q1 even as trading at JPM blew away expectations. But one factor that might be out of the banks’ control is the yield curve, which has flattened dramatically since the end of last year and continues to point toward less potential profitability for the sector. It’s still a long way off, but pay close attention to bank earnings next month to see if reports of the industry’s struggles start to hit quarterly results.

Good Trading,

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