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Fireworks Ahead? Holiday Looms, But Week Resumes With Key Data, Including Jobs

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July 3, 2017

(Monday Pre-Market) Monday is a “check the box” session: A trading day wedged between a holiday and a weekend where the market is only open because rules forbid having it close for more than 72 straight hours. But later in the week come some pretty key data, including monthly payrolls.

Before that, we need to get through Monday. It’s a shortened trading day, with the stock market closing at 1 p.m. ET. Nevertheless, there are reasons to tune in between the weekend cookouts and the Tuesday fireworks, including ISM data and June car and truck sales.

The market re-opens with a look at durable goods on Wednesday, sometimes a good indicator of consumer sentiment. The big kahuna, however, is Friday morning’s payrolls report for June, which comes out on its usual first Friday of the month despite Tuesday’s holiday. Unlike last month, when the jobs report came right before a key Fed meeting, there’s no Fed meeting scheduled until late July and the futures market projects that one to be a yawner, with less than a 3% chance of a rate hike. 

Still, it’s never a good idea to ignore jobs data. Recall that the May report failed to meet Wall Street’s expectations, with nonfarm payroll employment rising just 138,000. The headline number definitely disappointed, though there were signs of strength elsewhere.

Additionally, while jobs growth this year hasn’t reached the highs it saw last year, the economy keeps adding enough jobs each month to keep unemployment at pretty low levels, and the question is whether that’s showing up in wage growth. Perhaps it is, as Friday’s personal consumption expenditures (PCE) data showed a 0.4% rise in May personal income. That was above Wall Street’s estimates, after a 0.3% rise in April. The wages component of the June payrolls report is definitely going to be worth watching.

On the other hand, anyone looking for more signs of inflation likely came away disappointed after the PCE data, which showed the PCE price index up just 1.4% year over year, down from 1.7% in April. As Briefing.com noted in its analysis after the PCE report, the key takeaway is that inflation moved away from the Fed's longer-run inflation target of 2%, not toward it. That could inspire more thought that the Fed is liable to wait longer – perhaps until its December meeting — to deliver its third rate hike of the year.

Looking at other data that came out Friday, Chicago PMI crushed expectations, hitting 65.7 in June, up from 59.4 in May. That’s the highest reading in three years, and shows strength coming out of the Midwest economy. Monday’s ISM index is the next marker for manufacturing activity, so keep watch to see if it reflects more widespread spark, or if the Chicago number ends up looking like more of a regional factor. The ISM was 54.9 in April.

Also on the calendar Monday: June car and truck sales. Recall that the May report showed weakness, with sales at less than 17 million on an annual basis. Recently, General Motors (GM) lowered its industry-wide forecast for new vehicle sales in the U.S.  We’ve had a few really good years of car sales, so maybe those who truly needed new cars are a little exhausted and may stay with their cars for a couple more years. Others may be buying used cars.

10-Year Yields.

FIGURE 1: YIELD HOP.

Ten-year U.S. Treasury bond yields, tracked through midday Friday on the thinkorswim® platform from TD Ameritrade, have risen to their highest levels since mid-May in what appears to be a delayed reaction to the Fed’s mid-June rate hike. Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

What To Watch in Shortened Week: Considering the coming week is just three and a half days (including a shortened Monday and a holiday Tuesday), there’s a lot to watch from a sector perspective in the days ahead. Some things to keep an eye on include whether financial stocks can continue pushing upward after the strong performance they’ve put in recently, and whether info tech can build on the slight turn-around it was executing as of late in the week. It appeared there was something of a sector shift going on between info tech and finance last week, so it could be interesting to see if that lasts.

Bond Fire: Another development worth watching is the selling in bonds that took 10-year Treasury yields up toward the 2.3% level by late last week for the first time since mid-May. This looks like it could be delayed reaction to the Fed’s June rate hike, and there’s probably too much noise being made by pundits. Bond yields remain relatively low and still well below where they were at the start of the year. Meanwhile, the U.S. dollar is trading near recent lows vs. a basket of other currencies, and it’s starting to look like the relatively weak dollar might pay some dividends for multi-national companies that depend on overseas sales. The coming earnings season could shed more light. 

Halfway There: The year is halfway over, and, if you’re like many investors, you may have profited from info tech’s big rally. Remember, even with Thursday's descent, info tech still leads all sectors year to date, and fundamentally there doesn't seem to be much justification for the sell offs we've seen. Still, it pays to keep things in perspective and remember that tech has had a big run and it probably isn't a good time to go all in. Investors who've benefited this year from these shares' eye-popping gains might want to check their allocations and re-balance if necessary.

This weekend might be a good time to dust off those financial statements and make sure the plans you had going into the year haven't gotten out of whack due to the market action. Remember the old adage not to spend more time planning your vacation than you spend on your investment plans.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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