Market Update - July 8

The stock market closed Monday's abbreviated session, which marked the start of the new month, new quarter, and second half of the year, on a slightly higher note. Volume was naturally lighter due to the early close ahead of the Fourth of July holiday, but decent for a shortened day of trading.

Overall, conviction was lacking as many participants extended the holiday break into a four-day weekend. The major indices traded around their flat lines for the entire session, ultimately settling near their highs of the day with modest gains.

EV makers Tesla (TSLA) and Rivian (RIVN) were top standouts after impressing investors with their Q2 delivery numbers.

The SPDR S&P Regional Banking ETF (KRE) rose 2.3% and the SPDR S&P Bank ETF (KBE) rose 1.9%. These moves followed capital return plans announced by some banks after the stress test results.

Reviewing Monday's economic data:

• The June ISM Manufacturing Index fell to 46.0% (Briefing.com consensus 47.1%) from 46.9% in May. The dividing line between expansion and contraction is 50.0%, so the sub-50.0% reading for June reflects a general contraction in manufacturing activity for the eighth straight month.
  • The key takeaway from the report is that the manufacturing sector continues to operate in a state of contraction as optimism about the second half of 2023 weakens amid recession concerns. According to the ISM, a Manufacturing PMI above 48.7%, over a period of time, generally indicates an expansion of the overall economy.
• Total construction spending increased 0.9% month-over-month in May (Briefing.com consensus 0.4%) after increasing a downwardly revised 0.4% (from 1.2%) in April. Total private construction was up 1.1% month-over-month while total public construction rose 0.1% month-over-month. On a year-over-year basis, total construction spending was up 2.4%.
  • The key takeaway from the report is the renewed strength in new single family construction, which reflects the pickup in demand for housing despite the jump in mortgage rates.

The major indices all registered losses ranging from 0.2% to 1.3%. Several catalysts drove market participants to take some money off the table amid a lingering sense that the market is due for a pullback following its big run in the first half of the year.

Those catalysts included geopolitical angst and concerns about global growth following the news that Services PMI readings for June out of China and the eurozone were weaker than expected, that the U.S. is looking to restrict China's access to cloud computing, and that China said foreign entities will have to request permission to export gallium and germanium.

There was also some knee-jerk selling in the wake of the release of the FOMC Minutes for the June 13-14 meeting at 2:00 p.m. ET. The minutes didn't contain anything surprising, though, and the major indices quickly bounced back from the spate of selling interest. Ultimately, the stock and bond markets finished their sessions in close proximity to where they were trading when the minutes were released.

Reviewing Wednesday's economic data:

• Factory orders increased 0.3% month-over-month in May (Briefing.com consensus 0.6%) following a downwardly revised 0.3% increase (from 0.4%) in April. Excluding transportation, factory orders declined 0.5% month-over-month on the heels of a 0.6% decline in April. Shipments of manufactured goods also increased 0.3% month-over-month after declining 0.6% in April.
  • The key takeaway from the report is that new order activity for manufactured goods remained weak, excluding transportation.

The major indices all registered losses on this downbeat session, yet they were able to rebound from intraday lows around mid-morning with no specific news to account for the move, although the rebound coincided with market rates sliding back from peak intraday levels. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average had been down as much as 1.4%, 1.6%, and 1.5%, respectively. By the close, their losses ranged from 0.8% to 1.1%.

Rising market rates, the biggest factor driving the retreat, created a reason to take more money off the table following the market's strong start to the year. The 2-yr note yield rose seven basis points to 5.01% and the 10-yr note yield rose 10 basis points to 4.04%. Those moves were in response to the strong labor data and the stronger-than-expected ISM Non-Manufacturing Index for June.

The bump in rates stoked valuation concerns in the stock market as participants considered the possibility of the Fed being more aggressive than expected with its tightening action. A 25 basis points rate hike in July has been solidified while expectations for rate hikes at future meetings increased.

Reviewing Thursday's economic data:

• The weekly MBA Mortgage Applications Index fell 4.4% with purchase applications dropping 5.0% and refinance applications falling 4.0%.
  According to ADP, private sector hiring increased by 497,000 in June (Briefing.com consensus 245,000) following a downwardly revised 267,000 (from 278,000) in May. Jobs in the goods-producing sector increased by 124,000 while jobs in the service-providing sector surged by 373,000. Small and medium businesses led the hiring, registering gains of 299,000 and 183,000, respectively, versus a decline of 8,000 positions at large establishments.
• Separately, initial jobless claims for the week ending July 1 increased by 12,000 to 248,000 (Briefing.com consensus 245,000). Continuing jobless claims for the week ending June 24 decreased by 13,000 to 1.720 million.
  • The key takeaway from the report is much the same: initial jobless claims -- a leading indicator -- continue to run well below recession-like levels.
• The May Trade Balance Report showed a narrowing in the trade deficit to $69.0 billion (Briefing.com consensus -$69.0 billion) from an upwardly revised $74.4 billion (from -$74.6 billion) in April. The deficit moved in a positive direction, but not because of any overwhelming strength in exports. On the contrary, exports were $2.1 billion less than April exports. The swing factor was that imports were $7.5 billion less than April imports.
  • The key takeaway from the report is that the decline in exports and imports is emblematic of a softening in global demand that one would expect to see in an environment where many of the world's leading central banks are raising rates.
• The final IHS Markit Services PMI reading for June fell to 54.4 from 54.9.
• JOLTS - Job Openings totaled 9.824 million in May following a revised count of 10.320 million in April (from 10.103 million).
• The ISM Non-Manufacturing Index for June checked in at 53.9% (Briefing.com consensus 51.1%), increasing from 50.3% in May. The dividing line between expansion and contraction is 50.0%. The increase from May suggests activity in the services sector picked up steam in June.
  • The key takeaway from the report is the understanding that services sector activity expanded at a faster pace in June, a trend that will temper hard-landing concerns and presumably contribute to the Fed's inclination to implement additional tightening.
• Weekly EIA Crude Oil Inventories showed a draw of 1.51 million barrels after last week's draw of 9.60 million barrels.

The major indices traded in better form for most of the session; however, things deteriorated in the afternoon trade when some mega cap stocks rolled over into negative territory. That roll, in turn, weighed heavily on index performance. Still, there was more positive action under the surface despite the major indices closing near their worst levels of the day.

Advancers led decliners by a 5-to-2 margin at the NYSE and a nearly 2-to-1 margin at the Nasdaq. The Invesco S&P 500 Equal Weight ETF (RSP) rose 0.3% while the Vanguard Mega Cap Growth ETF (MGK) fell 0.5%.

Small caps and value stocks exhibited relative strength throughout the session, reflecting the pro-growth mentality driving the tape. The Russell 2000 rose 1.2% while the Russell Value Indices all outperformed their growth counterparts.

The Employment Situation Report for June served as the primary catalyst for the price action.

Reviewing Friday's economic data:

• Nonfarm payrolls increased by 209,000 in June (Briefing.com consensus 220,000) and there were downward revisions to April and May that, combined, showed 110,000 fewer jobs than originally thought. Average hourly earnings, though, increased a stronger than expected 0.4% (Briefing.com consensus 0.3%) and May was revised up to 0.4% (from 0.3%), so the year-over-year change in June was unchanged at 4.4%.
  • The key takeaway from the report is that it continued to fit in the soft landing zone, as payroll growth slowed but remained positive; meanwhile, an increase in the average workweek and the 0.4% increase in average hourly earnings are a boon for aggregate earnings that will continue to support both discretionary and non-discretionary spending.