This morning, we received a number of important reports on the economy. At 8:15 A.M. (EDT), payroll processor Automatic Data Processing (ADP) reported that private-sector payrolls increased by 278,000 in May, handily beating the consensus forecast of 180,000. Then, initial jobless claims for the week ending May 27th totaled 232,000, compared to 235,000 in the previous week. These reports come on the heels of yesterday’s Job Opening and Labor Turnover Survey (JOLTS) showing an increase in job openings, reversing a three-month downward trend. The JOLTS and ADP data were not what the Federal Reserve would like to see in its battle to tame labor inflation. Not surprisingly, Treasury market yields moved higher on the data and weighed on the performance of the equity market yesterday. These reports come ahead of tomorrow morning’s report from the Labor Department on May employment and unemployment.
There was big news overnight from Washington, where a big hurdle was cleared as the House of Representatives passed the debt ceiling bill by a larger-than-expected bipartisan majority and moved it along to the Senate, which is expected to take up the bill at 10:00 A.M. (EDT) this morning.
Also today, we received another reading on productivity, which is closely monitored by the Federal Reserve. This too did not make for particularly good reading, with first-quarter productivity declining 2.1%. Other things equal, this indicates reduced production of goods, with resultant inefficiency that adds to the inflation worries. On a positive note, unit costs came in below expectations. Following today’s economic reports, the equity futures are indicating a slightly weaker start to the trading day stateside.
At 10:00 A.M. (EDT), we will get the latest reading on manufacturing activity from the Institute for Supply Management (ISM). Manufacturing activity has fallen for five-consecutive months and, along with a struggling housing sector, are big reasons why investors are worried about a recession later this year. The housing market struggles, two-straight quarters of earnings declines for Corporate America, falling oil prices (crude is coming off its worst month since November, 2021), and the continued inversion of the Treasury market yield portend that a recession lies ahead. This backdrop has hurt the stocks of cyclical (economically-sensitive) companies and is a primary reason why the Dow Jones Industrial Average, with a solid weight of such businesses, has fallen in seven of the last eight trading sessions.
Fears about a looming recession were not quelled by yesterday’s Beige Book summation of economic conditions from the Federal Reserve. The Fed’s report detailed that the U.S. economy showed signs of cooling in recent weeks, as hiring and inflation eased slightly. However, the slowing pace of growth may not be enough to keep the central bank from pausing on the interest front for an extended period. In fact, commentary from two prominent Fed Presidents yesterday afternoon were viewed as pointing to a hawkish pause. That is, leaving rates unchanged later this month, but raising them at the July Federal Open Market Committee (FOMC) meeting. This, along with the aforementioned JOLTS release, put some upward pressure on Treasury rates and hurt the higher-growth stocks and the more risky asset classes (e.g. Bitcoin). The tech-heavy NASDAQ Composite finished lower yesterday on these developments.
Progress on the debt ceiling is encouraging, but has likely been assumed by most traders.
Meantime, there was some earnings news of note since yesterday’s closing bell. Salesforce (CRM), CrowdStrike Holdings (CRWD), and Okta (OKTA) all surpassed revenues and earnings forecasts, but investors are bidding those stocks lower in pre-market action, mostly on conservative full-year revenue prognostications from the technology companies on macroeconomic worries. Salesforce reported its slowest quarter of revenue growth in more than a decade. Likewise, department store operator Macy’s (M) beat earnings-per-share expectations, but also cut its full-year guidance, noting concerns about slower consumer spending later this year. Discount retailer Dollar General (DG) fell short of expectations on both the top and bottom lines, and its shares are down sharply in extended hours trading. The stocks of the consumer discretionary companies have been under pressure recently on the concerns cited by Macy’s in its quarterly release.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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