A trader works on the floor of the New York Stock Exchange.
New York Stock Exchange
As the stock market enters the usually weak June, the May employment report is a major event in the coming week. The stock performance in May was mixed.Large-cap stock index like this S&P 500 The Dow Jones Index rose. The S&P rose 0.5% and the Dow rose 1.9%. The small-cap Russell 2000 was flat, rising 0.1%, and the high-tech Nasdaq fell 1.5%.
Historically, June was not a strong month for stocks. Custom Investment Group pointed out that in the past 50 years, the Dow Jones Industrial Average rose only 0.12% in June, and was positive 52% of the time.
But in the past 20 years, June’s performance was much weaker, only getting 40% of the time. According to Bespoke data, June’s performance was tied with September as the worst month of the year, with the Dow Index falling 0.7% on average.
ISM’s important readings on manufacturing and service industry activities will become the economic focus of the coming week, but the most important indicator will be Friday’s employment report. According to Dow Jones, economists expect Friday’s employment report to show that approximately 674,000 jobs were created in May. After adding a disappointing 266,000 positions in April. This is about a quarter of what economists expected.
George Goncalves, head of MUFG’s US macro strategy, said: “Do you know whether we have failed to achieve employment expectations for two consecutive months, and the market will become tense.” “I hope we beat it, and then arouse positive The buzz, and then we attend the Fed meeting, and then we’hey, the economy is still on track.'”
The Fed will meet on June 15-16, and market experts have predicted that this will be the most important event of the month. Fed officials emphasized that they will maintain accommodative policies because they observe signs that the economy is indeed recovering. They also believe that the higher inflation readings are temporary because they compared the data with last year’s weak period.
The key to the market is whether the Fed begins to believe that inflation is higher than expected, or whether the economy is strong enough to make progress without much monetary support. Fed officials said that if they see signs of improvement, they will consider discussing a reduction in the quantitative easing bond purchase plan. This will be the first step towards raising interest rates and is expected to wait until at least 2023.
If inflation is overheated, the Fed’s main weapon to deal with inflation is to raise interest rates.
The prospect of high interest rates makes the stock market nervous, because it will mean that the company’s costs will increase and liquidity will decrease. In theory, higher interest rates also mean that investors are likely to choose higher-yielding bond investments rather than stocks.
For the economy, the next important reading is Friday’s employment report. Since the latest inflation data is much hotter than expected, the report is overwhelming. The latest is Friday’s personal consumption expenditure price index. The report showed that the core inflation rate increased by 3.1% year-on-year, the highest level since 1992.
The Fed’s beige book on the economy is expected to be released on Wednesday. It is expected that ISM manufacturing data will be released on Tuesday, and ISM service will be released on Thursday. Federal Reserve Chairman Jerome Powell delivered a speech on central banks and climate change at the “Green Swan 2021” global virtual conference on Friday.
The Fed stated that it will tolerate the average inflation level near the 2% target level until the inflation rate remains at a high level. Prior to the latest data, the inflation rate had been below 2%.
Julian Emanuel, head of the Equity and Derivatives Department, said: “Since the PCE index has appeared like all other inflation indexes in the past six weeks, it is hotter than expected, the market is approaching a call to the Fed to think Inflation is temporary.” BTIG’s strategy.
Emanuel said that the speculative activity surrounding Meme stock in the past week is a sign of a bubble and shows that investors have a lot of liquidity.One of these stocks AMC, Fell 1.5% after the close on Friday Up 116% in the past week, Making it a return of 1200% in 2021.
Emanuel said: “The net value of the index level is basically the stock market is trading sideways.” “Our view is still that, from a longer-term perspective, in general, this is a report that began in March last year. Bull market, and it will continue to run. In the medium term, the market has all relevant rights, and we believe that they will pay more attention to the Fed’s insufficient attention to price stability.”
Emanuel said he studied what happened to stocks when the core PCE was higher than the Fed’s 2% target. “By 1989, the average monthly rate of return (decline) for the months in which the core PCE exceeded 2% was 1.6%, and it was clearly biased towards more defensive industries. For example, the healthcare industry performed better than the market, and there was a bias towards technology. It’s very obvious. Various underperforming products,” he said.
According to data from the Standard & Poor’s Information Technology Department, technology stocks have risen 1.6% in the past month and have risen 5.9% so far this year. This sector lags behind the 12% growth of the Standard & Poor’s 500 Index (S&P 500).
So far, the best performing industries are cyclical, with energy growth of 36.2%, financial growth of 28.5%, materials growth of 20.1%, and industrial growth of 18.3%. Since the beginning of this year, communication services containing some of the Internet’s growing names have grown by 16%. So far, the performance of health care has been ahead of information technology, an increase of 8.6%.
In the past week, the Standard & Poor’s 500 Index rose 1.2% to 4,204 points, which is less than 1% from its all-time high. The Dow Jones Index rose 0.9% to 34,529, and the Nasdaq Index rose 2% to 13,748.
The red flag?
At the fringe of the financial market, market professionals are paying attention to signs of a surge in liquidity in the financial system. In the past week, agencies have poured unprecedented amounts of cash to the Federal Reserve, which was nearly half a trillion U.S. dollars on Thursday.
Goncalves said: “There is too much liquidity in the system. This is the result of the Fed’s ongoing quantitative easing policy and the expenditure of fiscal stimulus measures.”
He said that trillions of stimulus funds, including funds for state and local governments, have not yet been used, but have entered the banking system. At the same time, institutions and individuals continue to transfer funds to money market funds, which currently hold approximately US$4.6 trillion.
These funds also put pressure on the system because they put the funds in Treasury bills. Goncalves predicts that if the situation worsens, the Fed will raise the interest rate on excess reserves.
He said: “There is no precedent, because it is completely a function of the system with too much money.”
Goncalves said: “As there are not enough bills or short-term commercial papers, institutions are re-depositing cash to the Federal Reserve. There are not enough fixed-income assets.” He said that banks also don’t want to hold excess cash because it will affect their leverage ratio. , They are more willing to look for other higher-yielding investments.
He said that this has caused some speculation that the Fed will reduce its quantitative easing program sooner than expected.
Calendar one week ahead
Memorial Day Holiday
9:45 am Manufacturing PMI
Fed Vice Chairman Randal Quarles (Randal Quarles) 10:00 am
10:00 AM ISM Manufacturing
10:00 am construction expenditure
2:00 pm Federal Reserve Board Director Lyle Brainard
8:15 am ADP employment
12:00 pmPatrick Harker, Chairman of the Philadelphia Federal Reserve Bank
2:00 PM: Beige Book
2:00 pm Atlanta Fed President Raphael Bostic (Raphael Bostic), Chicago Fed President Charles Evans (Charles Evans), Dallas Fed President Robert Kaplan (Robert Kaplan)
Number of initial claims for unemployment benefits at 8:30 am
8:30 a.m. Productivity and cost
Service PMI at 9:45 a.m.
ISM service at 10:00 am
12:30 pm Atlanta Fed’s Bostic
1:00 PM Kaplan at Dallas Fed
1:50 p.m. Harker of the Philadelphia Federal Reserve
3:05 PM Quarles, Vice Chairman of the Federal Reserve
7:00 AM Federal Reserve Chairman Jerome Powell talks about central banks and climate change
8:30 am employment
Factory orders at 10:00 am