Market In Holding Pattern Ahead Of Major Jobs Data Tomorrow And Friday

Like a golf course, this week has a front half and a back half. But there’s a bit more rough and potential hazards on the back nine, so to speak.

Tomorrow and Friday are when we get a lot of potential market-moving data, especially related to the jobs picture. Friday’s employment report looms large, with possible implications for Fed policy (see more below).

In the meantime, it feels like the front half of the course is more earnings focused. Yesterday saw Zoom Video Communications (NASDAQ:ZM) easily beat analysts’ expectations, but the stock fell in pre-market trading despite ZM raising its earnings outlook. This morning, Advance Auto Parts (NYSE:AAP) also beat consensus estimates all around, but the stock barely moved. Broadcom (NASDAQ:AVGO), Lululemon (NASDAQ:LULU) and Slack (NYSE:WORK) all are on deck for tomorrow.

We’re in a bit of a holding pattern, where the major indices remain just below all-time highs but the momentum hasn’t been there for a test of those levels. It’s understandable, really, when you consider the possible ramifications of the data coming up not just this week with jobs but next week with May consumer prices. People may not be comfortable stepping into big new positions with so much news ahead and the Fed waiting in the wings.

Having said that, crude is up to around $68.50 as more people get back to work and travelling, and the Dow Jones Industrial Average is up six of the last seven sessions, which is pretty impressive. One of the so-called “meme” stocks, AMC Entertainment (NYSE:AMC), is having a really nice morning despite yesterday’s announcement that it had raised another $230 million in equity, thereby diluting its shares.

There just aren’t a lot of catalysts today, so it could be a session where we flip flop around. What’s a little nerve-wracking on days like this is that any news, whether it’s a Fed comment or something geopolitical, can send things flying one way or the other, so you have to be careful if you’re trading and stay aware.

h2 Jobs Report: Things To Watch/h2

Just two days are left until what’s probably the most important data of the month: May payrolls. One question analysts are asking is how high does the number have to be to affect the Fed’s thinking on possible tapering of its $120-billion-a-month monetary stimulus?

The average Wall Street estimate is that around 700,000 jobs were created in May. But that’s not the full story. April’s 266,000 was way below expectations, so keep an eye on Friday’s report to see if the government revises that upward. Many analysts think it will.

Also, if the headline number for May is as high as 800,000 or 900,000—near the high end of the range of Wall Street expectations—that may be something that raises eyebrows at the Fed. Especially if it’s combined with an upward revision to April.

The other wild card is wages. Some companies say they’re having trouble finding workers to fill openings, and last month’s Job Openings and Labor Turnover Survey (JOLTS) report showed openings at high levels historically. The May payrolls report could reveal whether employers are opening their wallets and paying more to attract new workers, something that often can drive up prices.

April’s hourly wage growth of 0.7% was on the high side, but analysts expect that to level off to just 0.2% in May, according to Briefing.com. Any number much higher than that could potentially play into people’s tapering fears.

As we said last week, those tapering fears get a lot of media focus, but may be a bit overblown when it comes to market impact. The Fed’s minutes from April showed officials there talking about planning to discuss a taper, and it didn’t really set off alarm bells in either stocks or bonds. In fact, as we said last week, it might have soothed some investors who’d wondered if the Fed had gotten a bit too easy going in terms of inflation and what to do about it.

While Friday’s jobs data followed by next week’s May consumer price index (CPI) report certainly could help shape Fed thinking going into its meeting June 15-16, it would be surprising to see the tone really change a lot based on one or two reports. Some analysts think the Fed’s annual Jackson Hole retreat in late August might be when we start hearing more about any actual tapering plans, assuming the economy stays strong.

h2 Jobless Claims Up Next As Market Teeters/h2

Before Friday’s payrolls data, tomorrow brings the weekly initial jobless claims report. The four-week average is now around 458,000 after posting a COVID-era weekly low of 406,000 a week ago, and now the consensus on Wall Street is for the first number with a “3” in front of it since this whole pandemic era began. The consensus is 395,000, Briefing.com said.

This succession of low weekly claims has played into ideas that the May jobs report could sparkle. Still, anything above 300,000 would still keep claims well above where they were before March 2020, when the long-term average was under 250,000.

Looking back, U.S. manufacturing continued to roll along in May. The closely watched ISM manufacturing index released yesterday had a headline figure of 62.1, up from 61.5 in April. The current level is near all-time highs.

Overall, it wasn’t the most incredible start to June. Major indices stayed near the flat line, though it’s important from a technical standpoint that the S&P 500 Index held 4200 at the end of the day Tuesday after briefly falling below it. Volatility also ticked up, which could represent jitters ahead of Friday’s jobs report and next week’s inflation data. Still, the Cboe Volatility Index (VIX) didn’t reach 20 after briefly falling to a pandemic-era low below 16 last week. The historic average for VIX is around 20, so it’s still below normal even with Tuesday’s rally.

After the tech-heavy Nasdaq 100 had a down month in May, it started June under a bit more pressure. With tech lately, it’s gone in stages. For a few days, investors seem to hate the sector, and then for a couple of days straight, they all love Big Tech.

It’s a tug-of-war between tech and so-called “value” sectors like energy and financials that isn’t likely to end in the short-term.

Rates haven’t done much so far this week, with the 10-year yield hovering around the midpoint of its long-term range between 1.5% and 1.7%. Where it goes next could depend in part on Friday’s jobs report and the Fed’s potential response.

h2 Boeing In Knock-Out Amid Reopening Hopes/h2

Monday’s session was like a tale of two big stocks: Boeing (NYSE:BA) and Abbott Labs (NYSE:ABT). Boeing got two upgrades from analysts and rose 3%, with strength coming partly from hopes that the reopening momentum could build into more travel demand. The number of passengers going through Transportation Safety Administration (TSA) airport check points hit 1.9 million on Memorial Day, close to a new post-COVID high.

Meanwhile, ABT shares took a massive hit, down 9%, after the company lowered its full-year guidance in part due to declining demand for COVID testing. Abbott now expects full-year adjusted diluted earnings of between $4.30 and $4.50 per share, down from the $5 per share it had previously projected. Analysts had expected ABT to earn $5.04 per share in 2021.

“We’ve recently seen a rapid decline in COVID-19 testing demand and anticipate this trend will continue, which led us to adjust our full-year guidance,” said Abbott CEO Robert Ford in a statement.

Bad news for ABT shareholders, perhaps, but good news for many of us because it means the pandemic is less of a factor.

Cancer Care Conference Ahead: We haven’t talked about biotech or medicine much beyond pandemic-related news over the last few months, but this week’s American Society of Clinical Oncology (ASCO) meeting puts cancer care back in the spotlight. ASCO starts Friday and continues into the weekend. Traditionally, a lot of interesting data tends to come out of this meeting, both on existing and potential cancer treatments. An ASCO media embargo on some of the late-breaking data gets lifted at 5 p.m. ET tomorrow, so investors with positions in some of the major medical companies might want to keep their eyes open for any headlines around that time. Companies that might see an impact from the conference include Exact Sciences (NASDAQ:EXAS), Roche (RHHBY (OTC:RHHBY)), Gilead (NASDAQ:GILD), Johnson & Johnson (NYSE:JNJ), AbbVie (NYSE:ABBV) and many more.

Biogen (NASDAQ:BIIB) is also on the medical watchlist this week, but for Alzheimer’s disease, not cancer. By June 7, the FDA is expected to decide whether to approve BIBB’s aducanumab, the Washington Post reported. If it gets a green light, it would be the first new drug approved for the disease since 2003.

Loosening The Taps: Maybe seeing crude flirt with $70 a barrel turned into a touchpoint for OPEC and Saudi Arabia, as they decided yesterday to go forward with plans to raise production both OPEC-wide and unilaterally for Saudi Arabia. This should provide a welcome new burst of supply at a time when the U.S. travel season is heating up and domestic producers have been slow getting production back toward the pre-COVID levels. Basically, it means 450,000 new barrels of crude a day getting pumped starting next month by OPEC even as Saudi Arabia separately starts loosening its own production cuts.

All this could be a nice boost for airlines, trucking, and shipping firms, all of which might have been beginning to feel the bite of rising oil prices. However, crude actually rose a bit after the news crossed, maybe because some investors might have been hoping for additional new supply considering the price surge. The new OPEC and Saudi Arabia production should bring cumulative additions over the past year to around four million barrels a day, the Wall Street Journal reported. That’s a big chunk of the 9.7 million barrels a day the group agreed to cut early in 2020 when COVID hit the market. But a lot of spare capacity appears to remain, which could potentially keep a lid on prices.

Margin Melancholy: Remember we recently noted that margin worries might start to drag earnings later this year? Seems like Morgan Stanley (NYSE:MS) had the same thought. In a note to clients Tuesday, the bank said, “Consensus forecasts are now baking in what appear to be unrealistic margin assumptions.” If that’s the case, one school of thought suggests stock prices may be too high.

MS sees a 15% price-to-earnings ratio (P/E) decline coming up. The SPX’s current P/E is a historically high 22 vs. earnings estimates for the next 12 months despite last quarter’s earnings strength. The consensus among analysts is for a great Q2 in terms of earnings, with most major firms predicting more than 50% earnings per share growth. However, those estimates are likely already built into the P/E ratio, so companies would have to do even better than expected in Q2 to push down P/Es without a drop in stock prices. Doing better—for many firms—could depend in part on finding ways to improve margin.

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Written By: TD Ameritrade