Sustainability of US stock market rebound in question as inflation concerns linger ahead of payrolls report
Investors took a breather this week as US stocks rebounded from a week of heavy selling and the latest inflation readings offered glimmers of optimism for those hoping for a spike in price pressures.
Beneath the surface, however, strong undercurrents of concern about inflation remain . April’s reading on the Federal Reserve’s favorite gauge showed a slowdown in inflation, but that alone wasn’t enough to settle the debate over where price increases go from here. And stocks can generally bounce back, even when they’re already in or heading into a bear market, said Wayne Wicker, chief investment officer of Washington-based MissionSquare Retirement, which oversees $33 billion.
With the S&P 500 and Nasdaq breaking a streak of seven consecutive weekly declines and the Dow Jones Industrial Average DJIA,
ending a streak of eight straight weekly declines on Friday, it might be easy to look past the recent volatility that has gripped financial markets since mid-May.
However, history shows that inflation can persist long after the Federal Reserve has started raising interest rates. Consumer confidence is currently at a 10-year low, while falling corporate profit margins are another threat to the S&P 500 SPX,
said John Higgins of Capital Economics, who sees the index bottoming out at 3,750 from Friday’s close near 4,158.
The ability of a single company like Target Corp. TGT,
or Snap Inc. SNAP,
issuing a missed profit announcement or warning that triggers larger stock sales signaled a distinct shift in market thinking toward the insidiousness of inflation, and could render parts of the payrolls report obsolete not agriculture next week.
Portfolio manager Scott Ruesterholz at Insight Investment, which manages $1.1 trillion in assets, points to the number of tech companies that have announced layoffs or hiring freezes since May 12, as well as additional companies who have seen pressures on staff ease, which may not show up in official data for months.
“The volatility resulting from individual company announcements is the greatest since 1987,” Ruesterholz said by phone. “The reason there are such outsized moves is that we have very little confidence in the outlook for inflation.”
“Often, the labor market tends to lag the economy’s turns and that’s especially true during times of high volatility,” said the New York-based portfolio manager, who believes labor market strains American labor peaked. “There will be a little less emphasis in employment data, particularly if the number is strong, because you will wonder if it is still the case today.”
Ruesterholz said he expects payroll growth to fall to 275,000 in May from 428,000 the previous month, below the consensus estimate for a gain of 325,000 jobs in a survey of economists by the Wall Street Journal. The data will be released next Friday. Additionally, he says, “the market is likely to sweep the payroll number away,” while heeding more of the average hourly wage reading, which he expects to moderate.
Contributing to this week’s stock market rebound, many investors felt that Fed policymakers may have to forgo aggressive interest rate hikes by the end of the year, given the impact likely on economic growth. Traders have lowered their expectations for where the main policy rate target can reach in 2022.
“This concept that the Fed is going to pull back for whatever reason is completely wrong,” said Thomas Simons, money markets economist at Jefferies. “The Fed is much more focused on inflation and less concerned about financial market deflation going forward.”
With fixing traders forecasting five more annual readings of over 8% in the consumer price index from May to September, one question is whether consumers will be able to withstand further increases in the price index. inflation and continue to support growth for the remainder of this year and 2023, Simons told MarketWatch.
Meanwhile, “the negative sentiment is going to be in play for a while,” Simons said. “Financial assets are going to look very, very cheap at some point and I think there will be some support for equities even in a period when markets are going sideways.”
Despite the rebound in US stocks this week, the Nasdaq Composite COMP,
remains firmly in a bear market, down more than 20% from its peak, while the S&P 500 briefly flirted with one. This is the case even after just two Fed rate hikes that left the target for the fed funds rate between 0.75% and 1%. Traders see a more than 50% chance that the central bank will raise the federal funds rate target to between 2.5% and 2.75% by December, while policymakers have acknowledged they are likely to make a few more increases.
Friday’s reading of the Fed’s preferred inflation gauge, known as the Personal Consumption Expenditure Price Index, showed price pressures eased in April. The rate of inflation over the past year slowed to 6.3% last month from a 40-year high of 6.6% in March, the first decline in a year and a half. However, investors have already witnessed a “headache”, when a seemingly weak inflation figure overshadowed the broader momentum of still rapidly rising costs.
Recent volatility in financial markets offers indications of how quickly investors are willing to dismiss even positive economic data in an environment of higher inflation. A good example is the April retail sales figures, released on May 17, which climbed 0.9% and gave many investors reason to believe that the economy was still strong. Stock investors cheered the news that day, only to see Dow industrials slip nearly 1,200 points on May 18, while taking their worst daily plunge in about two years, as fears of stagflation eased. installed and rising costs have eroded retailers’ quarterly profits.
However, most of the drop in stock values ”can be fully explained by falling multiples, not falling earnings,” said Ed Al-Hussainy, a senior interest rate and currency analyst based at New York at Columbia Threadneedle Investments, which managed $699 billion in March.
Related: Here’s the real reason the stock market is taking off — and it’s not because of weak earnings
Over the past 20 years, more than half of the S&P 500’s strongest days have occurred during bear markets, according to MissionSquare Retirement’s Wicker. “So it’s entirely possible, even after a week like this pushing us higher, to see more volatility that could drive markets lower in the coming months,” he said.
“Next week’s labor market data really takes a back seat to people’s attention to Federal Reserve meetings and the current direction of inflation rates.”
The May nonfarm payrolls report, to be released on June 3, is the highlight of the upcoming holiday-shortened week. US financial markets, including the New York Stock Exchange, will be closed Monday for Memorial Day.
If there’s an upside surprise in jobs gains, plus a bigger-than-expected fall in unemployment from April’s 3.6% level, “it strengthens the case for a rapid tightening of monetary policy that keeps the Fed on track for a 50 basis point hike each in June and July,” said Bill Adams, chief economist at Comerica Bank, based in Toledo, Ohio. the pace of job gains persists into the next few months, policymakers could rise another half a point in September, he said.
By contrast, a big miss would imply “less urgency to get interest rates back above 2% or 3%” – suggesting a pause or reduction in the size of moves, Adams said by phone.
U.S. data released on Tuesday includes the March S&P CoreLogic Case-Shiller National House Price Index, the May Chicago Purchasing Managers’ Index and the Conference Board’s May Consumer Confidence Index. The next day brings the final reading of the U.S. S&P Global manufacturing PMI for May, the ISM manufacturing index and the Fed’s Beige Book report, as well as April’s data on job openings, quits and spending. construction.
Thursday’s data releases include the Automatic Data Processing Private Sector Employment Report for May, Initial Weekly Jobless Claims and First Quarter Productivity and Unit Labor Cost Revisions. .
Friday brings May data on the US Labor Department unemployment rate, average hourly earnings, labor force participation, the S&P Global US services sector PMI for May and the ISM services index.