After Five Winning Quarters, Q3 Off to Wobbly Start Ahead of Jobs Data, OPEC

The second half is starting right where the first half finished, with slow, plodding upward movement. We’re off to a new quarter and we’ll see if we can make it six in a row after five straight quarters of gains.

Stocks wobbled in overnight trading despite some strength in European markets, and this might be the way things stay a lot of the day. It’s possible we could be in for a slow, lackluster session amid pre-COVID level volatility as people gear up for tomorrow’s jobs report. Analysts expect around 680,000 jobs were created in June. More on that below.

Weekly initial jobless claims this morning fell to a new pandemic low of 364,000, down from a revised 415,000 last week. Stocks didn’t move much on the data in pre-market trading, maybe because we get a much fuller picture of the jobs situation tomorrow.

h2 China Factory Data, OPEC+ Decision Command Early Focus/h2

Overnight, there was some disappointing data from China as factory activity slowed in June and now is at a level where it’s barely expanding. Despite that, crude prices jumped to nearly three-year highs above $75 a barrel this morning ahead of a possible OPEC+ decision on output. U.S. crude stocks dropped sharply last week, according to the government, highlighting how much demand there is as the economy re-opens. OPEC+ basically means OPEC plus Russia, by the way.

We should hear a decision from OPEC+ soon, and Reuters reported this morning that the organization could lift production by 2 million barrels a day. That’s above analysts’ projections of 500,000 going in, so maybe that can help cool things off in the crude pit. We’re at a point technically where crude futures could hit some technical resistance between $75 and $77, but time will tell. Meanwhile, gas prices are above $3.50 a gallon in a lot of places, so it’s an issue that’s hitting consumers in the pocketbook.

Semiconductor company Micron Technology's (NASDAQ:MU) earnings yesterday afternoon looked solid and so did its outlook, but shares fell in pre-market trading. This may be a “buy the rumor, sell the fact” situation, though MU shares haven’t rallied quite as much this year as some other chip stocks like Nvidia (NASDAQ:NVDA) and the overall sector. Different analysts raised and lowered their price projections for MU following earnings, and it’s this churn and debate that helps make the market interesting. Either way, MU said it expects demand to remain strong, which sounds positive for the industry.

In other earnings news, Walgreens Boots Alliance (NASDAQ:WBA) also had a good quarter and raised guidance. Its shares rose about 2% in pre-market trading. If MU and WBA are sneak previews of how this coming earnings season is going to go, the early reviews look pretty decent. We’re finished with the old earnings season and it’s on to the new one.

h2 Yields Lost Significant Ground In Q2: Should We Worry?/h2

The 10-year Treasury yield ended the old quarter near 1.46% before inching up to 1.47% this morning. That’s down from around 1.75% at the end of Q1, a pretty significant drop.

Though some analysts say weak yields could ring alarm bells about a possible economic skid, one guest on CNBC yesterday had an interesting observation. He said if lower rates are part of a general slowdown theme, it’s not really being reflected in the stock market. For instance, there’s been no general run lately toward some of the “defensive” sectors like Utilities and Staples.

Those two—which often do well in a bad economy—are actually among the worst performers of the last month, while Energy, a sector you’d normally see edging lower if the economy were on the wane, rose nearly 2% in June as crude continued gaining and sits near three-year highs.

On the other hand, some commodity prices came off their recent peaks, which can be a sign of falling demand, and materials and industrials performed poorly in June. Also, the dollar index rose to nearly two-month highs this week and moved up again on Wednesday. All of this could indicate a bit more of a defensive posture, but it’s hard to really pinpoint whether that’s in anticipation of a declining economy or simply profit-taking toward the end of the quarter.

One other possibility is that the weakness in yields this week in particular might reflect growing concerns about the Delta variant of the COVID virus. However, the Centers for Disease Control and Prevention (CDC) director said on TV Wednesday that fully vaccinated people are “quite protected” from variants.

Recent weakness in yields and a falling yield curve (where the gap between longer-term and shorter-term yields narrows) can be tough news for financial stocks. However, that sector hasn’t performed badly at all over the last week, perhaps helped by announcements of big banks raising dividends and also by anticipation ahead of what some analysts believe could be a huge earnings season for many Wall Street financial firms. The Financial sector also did pretty well on a quarterly basis as yields fell, so it feels like some of the typical metrics are a bit out of whack right now.

h2 Pied Piper/h2

One metric followed standard operating procedure recently, however. Lower yields tend to help growth sectors like tech, and it’s been by far the best performer over the last month, up nearly 7%.

Though tech had an off-day Wednesday, for the next few months investors might want to consider watching Tech closely for possible clues of where the rest of the market might go. The “FAANG” stocks have started to lead the way, but the question is whether they’re strong enough to bring everybody along for the ride. Maybe consider including Microsoft (NASDAQ:MSFT) in your thoughts as a co-FAANG member, as it seems to move with the rest of that group a lot of the time.

Though they’re often considered “growth stocks” because their businesses continue to accelerate, Apple (NASDAQ:AAPL) and MSFT since COVID have shown the ability to rise or at least hold their value when caution hits the rest of the market. This could reflect some investors seeing them as “defensive” stocks. However, keep in mind that there’s never a “safe” investment, and remember that both AAPL and MSFT struggled earlier this year when so-called “cyclical” sectors led the way and rate fears ramped up. There’s no free lunch.

h2 Review Session/h2

Looking back at Q2, nearly every S&P sector rose, led by real estate’s 12.2% gains in this sizzling housing market. Info Tech was a close second, up 12.2%, and communication services got the bronze with 11%.

The only red spot on that quarterly scorecard was Utilities, which fell 1.25%. Staples was another weak spot, rising just a tad. It’s hard to believe looking back at mid-April that utilities was a top performer then. Things really came back to earth for that sector as investors gravitated more toward areas where they thought they’d get better growth.

Overall, the SPX rose about 8% in Q2 and is up just over 14% for the year. So it’s been pretty consistent in quarterly growth. It’s also enjoyed five positive quarters in a row since that wretched Q1 of 2020.

What could threaten this positive streak in Q3? Maybe more concerns about the Delta variant of COVID. Or potentially thoughts that earnings and economic growth might level off a bit after what’s expected to be huge first-half growth, especially if earnings season guidance from companies doesn’t live up to hopes. Also, if the Fed gets more hawkish and yields start to rise, that could potentially throw a wrench into any Q3 party plans for investors. Rising crude prices also could start to hurt some sectors like transports, which actually are already down pretty far from their spring highs.

For now, the focus is on short-term plans, mainly what to watch for tomorrow in the monthly payrolls report. As we’ve mentioned , analyst consensus from Briefing.com projects 680,000 jobs created in June, up from 559,000 in May. We’ll be watching wages as well, which analysts see rising 0.4%. A bigger than expected jump in wages could conceivably get peoples’ inflation radars flashing again.

Diaper Brigade: One possible obstacle to reopening is something we’re probably going to get an update on Friday in the payrolls report. Basically, there appears to be a shortage of service workers prepared to go back and take jobs at restaurants, hotels, and other venues. This situation could ease by fall when kids go back to school and federal checks stop coming, but for now, many people appear to be choosing to stay home while the kids are home for the summer. This makes child care services an interesting metric to check when we get the report. It’s a category that saw major growth in the May data, and we could see numbers rise even more as many companies urge workers to come back to the office in coming months.

You May Remove Your Card Now: As financial sector earnings approach the starting line in a few weeks, remember that Financials include far more than the biggest Wall Street banks. Payment processing companies are another large component, and some could face tougher sledding. That may sound counterintuitive considering high levels of consumer confidence reported earlier this week by the Conference Board. That confidence, the strongest since the pandemic began, would normally suggest people getting out and spending, which would often mean good things for payment processors.

The issue for these firms, however, is that consumers may be a bit too flush. Some industry followers say they’ve seen higher rates of people paying off their credit card balances, which of course could mean lower interest income for the processors. Also, government checks appeared to swell many peoples’ savings accounts, which may mean less need to use credit to buy smaller-ticket items, research firm Briefing.com observed. Though the two companies haven’t confirmed dates yet, both Visa (NYSE:V) and Mastercard (NYSE:MA) typically report late in the first month of earnings season, which would put their earnings later this month. Big banks, too, have credit card divisions, so they could also feel a pinch. However, if you’re a Wells Fargo (NYSE:WFC), for instance, it’s possible that what you lose on the credit card side you could get back on the auto and home-financing businesses.

Slow Trading Could Drag Major Banks: For big Wall Street banks, the Q2 earnings challenge could come from their trading businesses. There’s been some back and forth in the stock market recently, which could be good for banks’ trading volume, but on the fixed income side it’s been very difficult and volumes are down a bit. The Q1 was a huge quarter for JP Morgan Chase (NYSE:JPM) in fixed income trading, which rose 15% and beat analysts’ average estimate by $800 million. Fixed income trading in Q1 for Goldman Sachs (NYSE:GS) rose 31% to $3.89 billion. All that happened in a quarter that saw the benchmark 10-year Treasury yield gallop from below 1% at the start of the year to 1.76% by late March.

It’s been a big contrast in Q2 as the 10-year yield mostly hovered between 1.45% and 1.65%, with hardly any major up or down moves except for a little flurry earlier this month when the Fed started to sound more hawkish. Looking ahead, the most consistent trading business leaders among Wall Street banks are likely to be the outperformers, but perhaps even they might see a drop in fixed income trading from a year ago when COVID had the markets moving all over the place.

Written By: TD Ameritrade