Investors Are Already Looking Toward Friday’s June Jo…

Shawn Cruz Director of Derivative Strategy, TD Ameritrade

(Tuesday Market Open) Equity index futures are pointing to a lower open as investors come off the extended holiday weekend. Even though the week has just started, investors are already looking forward to Friday’s Employment Situation report.

Potential Market Movers

There are several employment indicators leading up to Friday’s June job report, and they’ll likely serve as tea leaves for analysts trying to guess those key numbers at the end of the week. With an increasing number of firms seeing a higher likelihood of a recession, June’s jobs report will be an important one as analysts and investors look for chinks in the armor of a strong labor market.

In fact, it’s likely that the yield curve will invert once again this week. The 2s10s yield spread is near zero which is a popular indicator for recession.

the 10-year Treasury yield (TNX) continued to slide this morning in premarket action, falling more than seven basis points to 2.81% as investors still appear to be looking for safe havens. the Cboe Market Volatility Index (VIX) confirms that nervousness as it shot up more than 5% ahead of the opening bell to a reading just shy of 29.

the US Dollar Index ($DXY) also broke higher once again this morning as international investors leaned toward the safety of US Treasuries as well. The higher dollar is likely to be a drag on multinational stocks as currency headwinds are getting stronger again. The dollar index appears to be building toward another 52-week high and is trading at 2002 levels. In fact, the dollar and the euro could trade at parity soon, which hasn’t happened since 2003.

However, in today’s economic headlines, Asia is drawing the attention. Japan’s service PMI reached a nearly 9-year high, good news for the country that has struggled with decades of economic doldrums. the Nikkei was up more than 1%.

China may be getting some tariff relief from the United States. President Biden is considering ending some Trump-era restrictions that would give the US some inflation relief by opening fresh supplies from China. However, simply repealing tariffs could just make Chinese goods cheaper, which could lead to higher demand and with China still locking down its people due to its zero-COVID policy, its plants may not be able to meet demand. Additionally, removing tariffs runs a potential risk of the White House looking weak on China in a midterm election year where Democrats may lose majority in both the House and the Senate.

the Shanghai index was down 0.04% as Beijing performs another round of mass COVID testing. Testing could lead to additional lockdowns or other pandemic measures that could pressure the technology-heavy Nasdaq Composite ($COMP). The Hong Kong Hang Seng rose 0.10% despite typhoon disruptions.

Reviewing the Market Minutes

Stocks shrugged off increasingly loud recession signals as all major indexes finished higher on the first day of 2022’s third quarter.

For the second time in a week, the Federal Reserve Bank of Atlanta adjusted its GDPNow tool downward to -2.1% at midday Friday from -1.0% just the day before. With the first quarter’s 1.6% decline in gross domestic product (GDP), an official negative reading for the second quarter on July 28 would confirm the technical definition of recession—two successive quarters of negative growth.

It’s been a starting turnaround week for the Fed’s productivity tracking tool, which listed a positive reading of 0.3% only on July 27.

After its worst first half since 1970, the S&P 500 (SPX) gained 1.06% in Friday’s trading to close at 3,825.33. the Dow Jones Industrial Average ($DJI) pink 1.05%, and the Nasdaq Composite ($COMP) advanced 0.90%. The small cap Russell 2000 (RUT) advanced 1.16% to close out Friday’s trading before investors packed up for the three-day Fourth of July weekend.

Just the Cboe Market Volatility Index (VIX) moved back to a calmer 26.70 before the close.

Homebuilding stocks helped drive the market higher, with Lennar (LEN) up 5.71%, DR Horton (DHI) ahead 5.89%, and PulteGroup (PHM) advancing 6.54% during the session. Risk-off investors putting their money into Treasuries have helped push Treasury yields lower, which drive mortgage rates lower too. During the shortened pre-holiday session for bond trading, the yield on the 10-year Treasury note fell to 2.901% from 2.973% on Thursday. That rate was near 3.5% on June 14.

All sectors finished in the green, led by utilities (+2.48), consumer discretionary (+1.97), and real estate (+1.86). Energy, fourth in line, staged a comeback with WTI crude oil at $108.46 a barrel, up 2.55% for the day.

Perhaps some optimism sprung from accelerating evidence that the economy is slowing day by day and could lead the Fed to be less aggressive in hiking its key rate at the conclusion of its next meeting July 27.

The central bank was under considerable pressure last month to deliver a 75-basis-point increase, and with Thursday’s PCE inflation reading coming in below expectations and Friday’s June ISM Manufacturing PMI number falling to a 2-year low, many wonder if the central bank could become less hawkish as the summer rolls on.

Jobs will figure strongly in next week’s data, with JOLTS job opening on Wednesday and June unemployment on Friday. Investors will want to see if red-hot hiring is finally slowing down.

Stocks making news at the close of Friday’s trading included:

  • GM (GM) finished the week up 1.4% after warning about supply chain-driven manufacturing issues that could affect earnings.
  • Kohl’s (KSS) lost nearly 20% near the close after cutting its second-quarter outlook and calling off talks to be bought by Franchise Group (FRG).
  • Micron (MU) lost another 3% after reporting a better-than-consensus profit but a lower-than-expected sales outlook to weakening chip demand.

Despite the European Union announcing that eurozone inflation had reached a record high in June, the Stoxx Europe 600 finished unchanged. Asian indexes closed lower with Japan’s Nikkei 225 off 1.7% and the Shanghai Composite down 0.3% lower. Hong Kong’s Hang Seng was closed for a holiday.

Three Things to Watch

Recession’s EdgeJPMorgan Chase & Co. (JPM) economists cut their midyear US economic growth forecasts after listening to economic news this week saying the nation is “perilously close to a recession” but is still looking for the economy to expand because employers may be unwilling to lay off workers despite current weakness in product demand. Many major financial firms have raised their odds of recession in recent weeks.

China a Port? Despite the news around China, Goldman Sachs (GS) analysts said late Friday that Chinese equities could be an investor haven if the developing world sinks into recession. The firm points out that the MSCI Emerging Markets Index is down nearly 20% for the year but that Chinese companies recovering from pandemic lockdowns and other drags on their economy could see strong domestic growth “at least in the short-term.”

Chinese Spark EVs: Chinese electric vehicle maker BYD has overtaken Tesla (TSLA) as the world’s largest EV seller. Despite ongoing COVID-19 lockdowns, the Warren Buffett-backed company was able to sell 134,036 new cars in June—a 162.7% increase year over year. BYD also sold 640,000 cars in the first half of the year which is a 315% increase from the same time a year ago.

Notable Calendar Items

July 6: JOLTS job opening report, ISM Services Index, and S&P US Services PMI

July 7: ADP National Employment Report, Challenger job cut survey, and earnings from Levi Straus (LEVI) and WD-40 (WDFC)

July 8: June Employment Situation Report and May consumer credit

Jul 12: Earnings from PepsiCo (PEP)

July 13: June Consumer Price Index (CPI) and earnings from Progressive (PGR) and Fastenal (FAST)

good trading,

Shawn Cruz

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