Market Update - June 3

The stock market started this holiday-shortened week on a mostly softer note. Initially, the market seemed poised for a stronger showing after participants learned over the weekend that President Biden and House Speaker McCarthy reached a debt ceiling agreement. Enthusiasm quickly dissipated, though, with uncertainty about the deal passing in both chambers of Congress still weighing on sentiment.

The lingering uncertainty about the passage of the debt ceiling deal, along with ongoing concerns about the economic outlook, kept the broader market in check. Market participants received the Consumer Confidence Index for May, which fell from last month's reading and showed that expectations remain "gloomy."

Also, worries about Fed policy came into focus after Richmond Fed President Thomas Barkin (not an FOMC voter) said he has one of the higher rate forecasts on the committee and he hasn't backed off of that, according to CNBC.

Mega cap stocks, along with other growth stocks, were a big source of support and helped to drive the relative outperformance of the S&P 500 and Nasdaq. The S&P 500 was able to maintain a position above 4,200 on a closing basis after slipping below that level a few times today.

Reviewing Tuesday's economic data:

• The FHFA Housing Price Index rose by 0.6% in March from a revised 0.7% increase in February (from 0.5%)
• The S&P Case-Shiller Home Price Index declined 1.1% in March (Briefing.com consensus -2.3%) following a 0.4% increase in February
• The Conference Board's Consumer Confidence Index dipped to 102.3 in May (Briefing.com consensus 99.5) from an upwardly revised 103.7 (from 101.3) in April. In the same period a year ago, the index stood at 103.2.
  • The key takeaway from the report is that expectations remain "gloomy," which incorporates a notable worsening in the outlook in May among consumers over 55 years of age.

The stock market closed out the last day of the month on a downbeat note. Uncertainty about the passage of the debt ceiling deal is still looming, yet concerns about growth and Fed policy drove a lot of the action on Wednesday. The major indices spent most of the day trading in a fairly narrow ranges near their worst levels of the session.

The market started to climb off session lows, though, as investors recalibrated the likelihood of a rate hike at the June FOMC meeting. This was in response to some less-hawkish commentary from a few Fed officials on the heels of Cleveland Fed President Mester (not an FOMC voter) telling FT that she sees no compelling reason to pause the rate hikes.

Fed Governor Jefferson (FOMC voter) said he thinks that "...skipping a rate hike at the coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming" and Philadelphia Fed President Harker (2023 FOMC voter) said he thinks the Fed can "take a bit of a skip for a meeting."

Despite the afternoon improvement, the major indices all turned lower ahead of the close after the S&P 500 found some resistance on a retest of its early session high. Concerns about global growth, which had been the biggest factor driving early weakness, remained in play.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index fell 3.7% (prior -4.6%) with purchase applications declining 3% while refinancing applications dropped 7%.
• Chicago PMI fell to 40.4 in May (Briefing.com consensus 46.1) from 48.6 in April.
• The JOLTS - Job Openings totaled 10.103 million in April from a revised 9.745 million in March (from 9.590 million).

The stock market had a strong showing Thursday, but it didn't start out that way. Things were more mixed shortly after the open until stocks found some upside momentum. Ultimately, the major indices all closed near their best levels of the day, which had the S&P 500 above the 4,200 level. The Dow Jones Industrial Average closed with the slimmest gain due in part to a sizable loss in Salesforce (CRM) after its earnings report.

The indices shifted into rally-mode shortly after the release of . Market participants were also digesting weekly initial jobless claims and the ADP Employment Change for May that reflected continued strength in the labor market.

There was also some pleasing data from overseas that pushed global growth concerns to the backburner for the time being. China's Caixin manufacturing PMI for May jumped back into expansion territory with a 50.9 reading (prior 49.5) and the eurozone's CPI moderated to 6.1% year-over-year in May from 7.0% in April while core CPI dropped to 5.3% year-over-year from 5.6%.

Mega caps and semiconductor stocks paced broad based gains. The Vanguard Mega Cap Growth ETF (MGK) rose 1.3% versus a 1.0% gain in the market-cap weighted S&P 500. The PHLX Semiconductor Index (SOX) rose 1.6%.

Reviewing Thursday's economic data:

• May ADP Employment Change 278K (Briefing.com consensus 160K); Prior was revised to 291K from 296K
  • The key takeaway from this report is that job growth is still strong, but that pay growth is slowing. For job stayers, the pain gain in May was 6.5% versus 6.7% in April.
• Weekly Initial Claims 232K (Briefing.com consensus 233K); Prior was revised to 230K from 229K; Weekly Continuing Claims 1.795 mln; Prior was revised to 1.789 mln from 1.794 mln
  • The key takeaway from the report is that businesses overall remain reluctant to cut staff size in large numbers, leaving the level of initial jobless claims well below what is typically seen in a recession environment.
• Q1 Productivity - Rev. -2.1% (Briefing.com consensus -2.7%); Prior -2.7%; Q1 Unit Labor Costs - Rev. 4.2% (Briefing.com consensus 6.3%); Prior 6.3%
  • The key takeaway from this report is that productivity was weak in the first quarter as the level of output (+0.5%) fell well shy of hours worked (+2.6%).
• May IHS Markit Manufacturing PMI - Final 48.4; Prior 48.5
• May ISM Manufacturing Index 46.9 (Briefing.com consensus 47.1); Prior 47.1
  • The key takeaway from the report is that it reflected an ongoing contraction in activity with New Orders and Supplier Deliveries falling, though the Production Index climbed back into expansionary territory, which gives some hope for an improvement in the coming months.
• April Construction Spending 1.2% (Briefing.com consensus 0.2%); Prior 0.3%
  • The key takeaway from the report is that continued weakness in new single family construction was overshadowed by strength in private and public nonresidential spending.

The stock market closed out this holiday-shortened week on a strong note. Technical momentum after the S&P 500 closed above 4,200 on Thursday was a contributing factor, along with positive reactions to the Senate fast-tracking passage of the debt ceiling bill in a 63-36 vote.

The biggest driving factor, though, was the Employment Situation Report for May, as it helped push recession and rate hike fears to the backburner for the time being. The employment report featured a 339,000 increase in nonfarm payrolls, a moderation in year-over-year average hourly earnings growth to 4.3% from 4.4%, and a bump in the unemployment rate to 3.7% from 3.4%.

Mega cap stocks had a decent showing, but the rest of the market had an even better performance. The Vanguard Mega Cap Growth ETF (MGK) rose 1.0% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 2.2%. The market-cap weighted S&P 500, which flirted with 4,100 last week, reached 4,290 at its high of the day and closed with a 1.5% gain.

All the major indices closed with sizable gains near their best levels of the session. 29 of the 30 Dow Jones Industrial Average components closed with a gain and all 11 S&P 500 sectors settled higher also.

Reviewing Friday's economic data:

• Nonfarm payrolls rose by 339,000 in May (Briefing.com consensus 190,000) from a revised increase of 294,000 in April (from 253,000)
• Nonfarm private payrolls rose by 283,000 (Briefing.com consensus 177,000) from a revised 253,000 in April (from 230,000)
• Average hourly earnings rose by 0.3% in May (Briefing.com consensus 0.3%) following a revised 0.4% incline in April (from 0.5%)
• The unemployment rate rose to 3.7% (Briefing.com consensus 3.5%) from 3.4% in April
• The average workweek fell to 34.3 hours (Briefing.com consensus 34.4) from 34.4 hours
  • The key takeaway from the report is that it featured strength in nonfarm payrolls that will help assuage concerns at this point about the economy suffering a hard landing, as well as a jump in the unemployment rate and dip in average hourly earnings growth on a year-over-year basis that should assuage some (certainly not all) of the Fed's concerns about the tightness of the labor market and wage-push inflation going into its June FOMC meeting.