This morning, we received a few reports on the U.S. economy from the Department of Labor. At 8:30 A.M. (EDT), we learned that initial jobless claims for the week ending June 1st totaled 229,000 which was up 8,000 from the prior week’s revised tally and may be an indication that the labor market is starting to soften a bit. In a separate report, we received the final revision on first-quarter productivity. That figure came in better than expected (+0.2%) and included a drop in unit labor costs. This was good news for the Federal Reserve in its battle to tame inflation as greater efficiency is likely to drive down production costs.
The equity futures, which were mixed heading into economic data, including what was deemed to be a hawkish interest-rate cut by the European Central Bank earlier this morning, are now indicating a modestly lower opening to the trading day stateside.
In general, the focus of Wall Street this week has been on the U.S. economy, with a number of important reports released over the last few days. The labor market has drawn much of the attention, and that will remain the case for the rest of this five-day trading stretch, as investors will receive the much-anticipated May employment and unemployment data from the Labor Department before the start of trading tomorrow morning.
For the most part, it has been the case of bad news is good news for stocks. That is because a weakening in the labor market would bring renewed sentiment that the Federal Reserve may begin cutting interest rates, perhaps as early as the July or September Federal Open Market Committee (FOMC) meetings. Investors should note that the central bank concludes its June FOMC meeting next Wednesday, at which time the committee is expected to leave the federal funds rate unchanged at 5.25% to 5.50%. Commentary from Fed officials, most notably Fed Chairman Jerome Powell at its post-decision press conference, will be closely monitored in an effort to get a better gauge about if and when the central bank may pivot on the monetary policy front. That is likely to be a market-moving event.
This week’s labor statistics, which included the report from Automatic Data Processing (ADP) showing that private sector job creation declined by 36,000, to 152,000 last month, suggest that sector may be weakening. The ADP figures also came on the heels of a weaker Job Openings and Labor Turnover (JOLTS) report, which highlighted a sharp drop in the number of job openings in May. The labor data put downward pressure on Treasury market yields and ignited a rally in the U.S. equity market.
The stock market’s performance has been somewhat bifurcated the last few trading sessions. The higher-growth stocks, including many in the technology sector, jumped on the drop in Treasury yields. Many of the higher growth, but often unprofitable tech companies are valued on their cash flow potential and not profits. Thus, when estimated future cash flows are discounted back to present terms at lower rates, it boosts the intrinsic value of a company, which can at times raise the appeal of the stocks of those entities to potential investors. Hence, the movement of funds into some of the higher-growing tech names. The communication services and industrial groups also were in demand yesterday.
Conversely, the weakening labor market, along with a continued contraction in manufacturing activity last month, according to the ISM survey, has raised concerns that the Fed may not be able to orchestrate a “soft landing” for the U.S. economy, especially if the central bank is steadfast in keeping interest rates “high for longer.” The economic worries hurt the value-oriented sectors, including many of the cyclical names. However, those industrial companies that are expected to be major players in building out the nation’s energy grid structure to meet the growing power needs for artificial intelligence (AI) platforms are very much in demand. This sentiment also has given a big boost to stocks in the power industry.
Turning to the corporate world, we did get some mixed quarterly results in the retailing sector after the close of yesterday’s trading. Shares of apparel maker lululemon athletica (LULU) are trading notably higher in pre-market action after the company beat expectations on both the top and bottom lines and lifted its full-year earnings guidance. Conversely, the stock of Five Below (FIVE) is down sharply in extended hours trading after the discount retailer posted revenues and earnings that fell short of Wall Street’s consensus forecasts.
In closing, let us take this opportunity on the 80th anniversary of D-Day, to remember and honor all the American and Allied soldiers who bravely fought in Normandy, France to ensure our freedom! - William G. Ferguson
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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