FOMC Minutes, China Worries in Spotlight Ahead of Labor Market Updates

This morning, tech looks like the weak spot, with mega-caps like Nvidia (NASDAQ:) (NVDA), Tesla (NASDAQ:) (TSLA), Microsoft, and Amazon (NASDAQ:) (AMZN) all under pressure, in part as a result from a Wall Street Journal report asserting that the United States wants to restrict China’s access to cloud computing.

Though there’s no rule that markets must rise or fall a certain amount, it’s worth noting that Wall Street hasn’t experienced a 1% down day in 26 consecutive sessions—the longest streak since November 2021. Still, volatility is extremely low, suggesting that major moves on any given day are less likely than usual.

Morning rush

• The 10-year Treasury note yield (TNX) was steady near 3.86%.
• The ($DXY) moved up slightly to 103.16.
• Cboe Volatility Index® () futures jumped to 14.46.
• WTI Crude Oil (/CL) rose to $71.19 per barrel.

Just in

The Caixin China General Services PMI fell from 57.1 in May to 53.9 in June—the worst reading since January. In Europe, meanwhile, Producer Prices fell for the first time in two years, dropping 1.5%.

Eye on the Fed

Futures trading indicates an 86% probability that the FOMC will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool.

The Fed minutes from the June 13–14 meeting coming out this afternoon could draw more attention than usual. Market participants remain puzzled by the FOMC’s unanimous “pause” vote even as policymakers dialed up projections for future rate hikes. The minutes might shed light on the reasoning behind that decision and why the Fed settled on what appears to be a one-meeting “skip” rather than a long-term pause.

What to Watch

Jobs countdown: June Nonfarm Payrolls bow on Friday morning and dominate other reports this week in terms of potential market and interest-rate impact. If jobs growth, wages growth, or both are much higher than expected, that could cement ideas that the Fed will hike in July and perhaps again in September.

Here is consensus for Friday’s jobs report, according to Trading Economics:

• June jobs growth of 225,000—down from 339,000 in May
• June monthly wage growth of 0.3%—unchanged from May
• June annual wage growth of 4.2% from a year ago, down from 4.3% in May.
• Unemployment of 3.6%, down from 3.7% the prior month

Tomorrow morning’s ADP June jobs report may get some attention. Keep in mind the ADP data hasn’t been reflective lately of official government job figures.

Job postings: Until recently, the monthly Nonfarm Payrolls report sucked most of the oxygen from the room, but these days a couple other jobs-related data points have elbowed in for more attention. Both are set for release tomorrow. The Fed is likely monitoring the May Job Openings and Labor Turnover Survey (JOLTS). April’s report showed openings back above 10 million, heading in what the Fed would consider the wrong direction after a couple of readings under that figure.

The Fed wants to see the gap narrow between available jobs and available workers, hoping that could keep wages from spiraling and spinning up inflation. But the economy’s strength—particularly in the services arena—has kept JOLTS at levels about 70% above historic prepandemic readings for the last year. A JOLTS number tomorrow below 10 million would be welcome from a Fed and rate perspective.

• Another blinking labor market light tomorrow morning is weekly Initial Jobless Claims, which ticked below 240,000 last week after several weeks above 260,000. On this metric, bad news is good news if you’re the Fed and the market. Higher claims could mean companies need less labor—perhaps another hint of cooling inflation. Consensus for tomorrow is 250,000, according to Briefing.com.
• The June ISM Manufacturing Index released Monday morning revealed more signs of lethargy with a reading of 46. That was below the analyst consensus from Trading Economics of 47 and down from 46.9 in May. A 50 reading is needed to show expansion. The ISM has now contracted eight months in a row, and Timothy R. Fiore, head of ISM’s Manufacturing Business Survey Committee, noted weakness across five of the six largest manufacturing industries. Transportation equipment was the sole area showing growth.
• Tomorrow we’ll get the ISM Non-Manufacturing data for June, a metric that’s been a bit stronger than the manufacturing index over the last few months. Consensus is 51.1, up from 50.3 in May, according to Briefing.com.

Stocks in the Spotlight

Borrowers and lenders: Bank earnings are around the corner, starting a week from Friday. As the big financials firms’ results approach, analysts have dialed back their financials sector estimates. They now see 5.3% year-over-year earnings per share growth in Q2, down from an 8.4% estimate back on March 31, according to FactSet. Revenues are expected to grow 7.8%, down from the March 31 estimate of 9.3%.

One weight on financials could be the inverted yield curve in Treasuries, which has near-term notes paying far higher yields than ones expiring further out. This isn’t the typical pattern, and historically precedes recessions. For banks, this environment is challenging, because banks often make money by borrowing in the shorter term and making longer-term loans.

For the S&P 500, the average Q2 earnings estimate is now for a 6.8% decline year-over-year—the worst since late 2020, according to FactSet. Unless analysts are far too pessimistic, it looks like it’ll be the third quarter in a row of falling earnings, but analysts see results improving later this year and gaining more ground in 2024.

Looking ahead: In case you missed it last week, you can still watch the Schwab Live 2023 Mid-Year Outlook, which features views from Schwab’s experts on what might be ahead in the year for the markets and the economy.

CHART OF THE DAY: POWERING UP. Stocks have been in rally mode despite the steady climb in 10-year Treasury note yields (TNX—candlesticks) over the last few weeks. The TNX bounced off its 50-day moving average (blue line) last month and closed Monday at its highest point since March 9, immediately before the Silicon Valley Bank (SVB) collapse caused market turmoil. The close that day was 3.92%, and the red line shows how close TNX is to reaching that level again. Data source: Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

All rise: Last Friday’s Supreme Court decision blocking the Biden Administration’s $400 billion student loan forgiveness plan could ultimately help slow economic growth if it dampens consumer spending. Businesses that could feel a negative impact include restaurants, hotels, airlines, and casinos—which are among the very services with strong demand that are helping to fuel high inflation, even with last Friday’s promising government numbers. Around 40 million Americans have education debt, and payments will be due starting in October after a three-year pandemic-related hiatus. Even though that’s several months away, the news could affect spending decisions relatively soon.

Emergency fund? The court announced its decision, coincidentally, the same day the government said personal spending rose just 0.1% in May, down from 0.6% growth in April. That was despite a 0.4% rise in personal income, the second month in the last three where income rose much faster than spending. It looks like people may be worried about recession and perhaps saving for a rainy day. Weak consumer spending and lighter wallets as student loans come due both look possibly deflationary and will likely grab the Fed’s attention. It could be interesting to hear from consumer-oriented companies during earnings season if they think they’ll feel the impact. Executives could be asked. Again, this potentially bodes better for stores on the lower end of the pricing totem pole, a trend already underway earlier this year.

Boxing gloves: Most investors have heard the old advice not to “fight the Fed.” Perhaps that should be augmented with new advice not to fight Congress. If we avoid a recession this year, Capitol Hill can arguably take some credit because fiscal spending remains a tailwind even as the Fed tries to slow things down. The federal government mandated close to $2 trillion in domestic spending early this decade to pump up the economy during the pandemic, and all that money keeps filtering into the economy. Efforts to “re-shore” manufacturing (bringing it back from Asia) and to rebuild infrastructure are among the factors driving demand for U.S. workers and potentially keeping wages (and inflation) in sticky territory. Despite all the spending on construction for so many projects underway, both industrials and materials stocks lag the overall SPX, though they’re holding up relatively well with year-to-date gains of 9.4% and 7%, respectively. That’s behind the overall SPX’s 2023 gain of 16%, but the overall index is swollen by mega-cap tech gains.

Calendar

July 6: June ISM Non-Manufacturing Index and May JOLTS job openings.

July 7: June Nonfarm Payrolls.

July 10: May Consumer Credit

July 11: No major earnings or data

July 12: June Consumer Price Index (CPI) and Core Consumer Price Index, Fed’s Beige Book,

Happy trading

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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