After one of the worst Mays on record, U.S. equities continued their slide yesterday after trading in positive territory for much of the day. Equities opened significantly weaker out of the gates yesterday after a global sell-off trickled over to our markets. However, after a better than expected ISM Manufacturing report of 59.7, marking the tenth consecutive reading above 50 (recall that a reading above 50 indicates the economy is growing, while a reading below 50 indicates the economy is shrinking), and a stronger than expected construction spending number, U.S. equities rallied for most of the day only to succumb to selling pressure in the last hour of trading. It feels to me like the market is really trying to generate a rally after this mini correction that has occurred over the past five weeks. Unfortunately every time it tries, a news story breaks that gives bulls the jitters and strengthens the bears’ position. Much of the recent news is occurring elsewhere in the world, whether it’s the military tensions on the Korean peninsula, the growing tensions in the Middle East, most recently Israel and Lebanon, the continued European debt and economic issues, or the speculated slowdown in China. These events are giving market participants pause here at home. Ultimately, I believe that the U.S. is poised for a rally in the near term and will decouple from the rest of the world on improving fundamentals and better economic data.
On the economic front, the calendar for the remainder of the week is as follows:
Wednesday June 2: MBA Mortgage Applications, Challenger Job Cuts YoY, Pending Home Sales MoM and YoY, Domestic and Total Vehicle Sales
Thursday June 3: ADP Employment Change, Nonfarm Productivity, Unit Labor Costs, Initial Jobless Claims, Continuing Claims, Factory Orders, ISM Non-Manufacturing Composite, ICSC Chain
Store Sales YoY
Friday June 4: Change in Nonfarm Payrolls, Change in Private Payrolls, Change in Manufacturing Payrolls, Unemployment Rate, Avg Hourly Earnings MoM and YoY, Avg Weekly Hours
This is a huge week on the economic front as we get the full employment report on Friday. The Change in Nonfarm Payrolls is surveyed to add 513K jobs which would be the best reading since 1997. In fact, one economist is suggesting that this number could be as high as 700k. This economic metric has showed job growth for four consecutive months and Friday’s reading would mark the fifth. Clearly we need to continue to see a pick-up in jobs for the recovery to be sustainable. The Unemployment Rate is surveyed to come in at 9.8%, down from 9.9% last month. Don’t expect to see a marked improvement in this metric as this number could in fact continue to move higher as individuals come back into the workforce to look for jobs. As mentioned above, if the employment report does not disappoint, U.S. equities could rally higher over the next week or so.
On the treasury front, yields have stabilized at low yield levels over the past few weeks. Market fears still exist and the flight to quality trade is not unwinding. If equities can generate a rally over the coming weeks, look for yields to back up as investors increase their appetite for risk assets. I don’t believe yields will skyrocket, but there is certainly room to move higher. Ultimately as I’ve said before, rates should remain lower for longer than people believe on lack of inflationary pressures and global sovereign debt issues.
On the fixed income front, remain nimble in times like these. Buy on dips and sell into rallies. Take advantage of mispriced new issue deals. This market continues to provide good total return and trading opportunities across the fixed income spectrum. In addition, we continue to like the barbell approach to investing given the current interest rate environment, potential outlook for rates, and lack of loan demand on the banking side.