Treasury Yields Spiking As Market Looks Ahead To Jobs Data, Raising Valuation Concerns

(Thursday market open) Things are heating up, and we’re not just talking about the July weather. A week from the start of Q2 earnings season, Wall Street is on tenterhooks awaiting tomorrow’s crucial June Nonfarm Payrolls report. In the meantime, there’s a host of labor data to digest today before Friday’s excitement.

Two job-related reports hit the tape today just before the open, and shortly after the bell the Labor Department will also release the May Job Openings and Labor Turnover Survey (JOLTS). The Fed monitors that one closely for any sign of cooling in the sizzling jobs market.

The heat isn’t only coming from jobs data. Treasury yields are also climbing the mercury, and that could be one factor weighing on stocks early Thursday. The 10-year Treasury note yield is flirting with 4% for the first time since early March. Higher yields could raise valuation concerns for some of the higher-priced stocks out there.

Stocks played defense Wednesday on their first day back from the Fourth of July holiday, with utilities, staples, and health care among the better performers during a mostly uneventful session. Some major Info tech stocks struggled again, and the sector is near the bottom of the sector scoreboard for the last week. A few mega-cap tech names were in the red this morning in premarket trading, possibly hurt by climbing Treasury yields. But in a welcome development, market breadth has widened somewhat recently.

Morning rush

• The 10-year Treasury note yield (TNX) climbed two more basis points to nearly 3.97%.
• The U.S. Dollar Index ($DXY) is stable at 103.13.
• Cboe Volatility Index® (VIX) futures continued to climb to 14.91.
• WTI Crude Oil (/CL) rose to $71.91 per barrel.

Just in

The ADP jobs report released this morning showed a massive 497,000 positions created in June, up from 267,000 in May. Service sector job growth far outpaced goods-producing growth, and ADP’s chief economist said “consumer-facing industries had a strong June.” However, ADP believes hiring is likely “cresting.”

Treasury yields spiked after the ADP report, but it’s important to remember that recent ADP figures haven’t been in sync with the government’s official jobs data. Today’s report doesn’t necessarily mean we’ll see a meteoric rise in tomorrow’s Nonfarm Payrolls data.

Weekly initial jobless claims of 248,000 were close to Wall Street’s consensus view and in the middle of the range seen over the last month. They remain up substantially from earlier this year.

Eye on the Fed

Futures trading indicates an 88% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its July meeting, according to the CME FedWatch Tool. U.S. economic data’s been mostly positive since June, reinforcing hike ideas.

The market prices in much less chance of an additional rate hike later this year, putting probabilities in the 30% to 35% range. By this time next year, the market anticipates nearly 80% odds that rates will be lower than now, in the 4.5% to 5% range. The Fed’s current target rate is between 5% and 5.25%.

Minutes from the FOMC’s June 13–14 meeting released yesterday didn’t seem to influence trading much on Wall Street, simply underscoring that committee members wanted to assess new data at the current rates before making the next move.

• Part of the thinking is based on the lag between rate hikes and their actual impact on the economy. The Federal Reserve hiked rates by 500 basis points in less than 14 months without taking a breath, and this pause presumably gave the economy more time to absorb the impact.
• While the vote to pause hikes was unanimous, it’s interesting that the Fed qualified policymakers’ desire to raise rates from here, noting that “almost all participants” agreed that additional hikes in 2023 would be appropriate.
• At the same time, not all of the FOMC necessarily wanted to pause in June, though the unanimous vote didn’t reflect dissent. Nevertheless, there didn’t seem to be any disagreement that inflation remained “unacceptably high” and that declines in inflation had been slower than expected.
• The housing market, in particular, seems to be a source of inflation worry among FOMC officials.

What to Watch

At 10 a.m. ET today, we’ll get the May JOLTS data. April’s report showed job openings back above 10 million, heading in what the Fed would consider the wrong direction after a couple of readings under that figure.

Consensus is for a headline number of 9.93 million, according to Trading Economics. That’s below April but still historically strong. JOLTS typically were in the 5 million to 6 million range leading into 2020.

Jobs countdown: June Nonfarm Payrolls are due out before the open Friday morning.

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

Stocks in the Spotlight

By most measures, U.S. auto sales in the first half of 2023 accelerated smoothly. Major carmakers like General Motors GM and Tesla TSLA saw resilience among auto buyers despite monthly payments soaring to historical highs that have nearly 20% of new auto loans speeding past the $1,000 monthly payment barrier. GM delivered 691,798 vehicles in the second quarter, up 19% year-over-year, the company said yesterday. First-half deliveries for GM rose 18%.

Tesla, GM, and Ford F saw shares gain traction in the last six weeks or so, The question is whether the second half of 2023 can build on this recovery; there are some indications that maybe not. Cox Automotive, an automotive services and technology provider, said it expects “minor slowing” in the second half after the first half’s anticipated 11.6% rise in sales volume. The firm sees 2023 sales rising to 15 million, up 8% from 2022. Headwinds will grow, the firm says, due partly to “credit availability” challenges. In other words, it’s getting harder for buyers to qualify for auto loans. 

Thinking cap

Ideas to mull as you trade or invest
Even a broken clock: Over the last two years, Wall Street analysts underestimated U.S. jobs growth by a cumulative (and massive) 2.6 million positions. The average analyst forecast for the monthly payrolls report is running about 100,000 shy of the actual number, missing by roughly 140,000 in May. Could June be the month when pessimistic job growth forecasts finally prove correct? The uptick of initial weekly jobless claims in late May and early June, which saw the weekly number rise above 260,000 on several reports, was the highest since late 2021. Also, the recent pullback in personal spending might suggest a worsening jobs picture. Many businesses are doing what they can with the workers they have instead of hiring additional employees, CNBC reported Wednesday, citing analyst research. Tomorrow’s workforce participation percentage could be a helpful indicator of job market resilience. It was steady at 62.6% in May. A rise would likely be viewed as positive for the market because more employed workers could cool inflationary wage growth.

Mergers stall: Though it’s a light week for corporate news, there are several merger-related items still on the stove. Last week, California Rep. Adam Schiff wrote the Federal Trade Commission (FTC) urging it to review the proposed $24.6 billion merger of grocery giants Kroger KR and Albertson’s ACI “very critically,” because he’s worried about the potential impact on workers. Other mergers that remain in limbo include Amgen’s AMGN proposed purchase of Horizon Therapeutics HZNP and Microsoft’s MSFT plans to buy Activision Blizzard ATVI. The FTC challenged the Amgen purchase in May, citing competitive concerns. It was the FTC’s first challenge in recent memory to a pharmaceutical merger. It looks like there won’t be resolution on this one until late this year, according to recent media reports.

Take it to the bank: The FTC has been relatively aggressive challenging mergers lately, which could restrain mergers and acquisition (M&A) activity. That’s bad news for big banks, which already are suffering from relatively slim pickings on the initial public offerings (IPO) front. Bank earnings season begins next Friday and could be a chance for investors to get an update on both the M&A and IPO environments. The S&P 500® Financial Select Sector Index (IXM) posted its 2023 low-to-date in late March after the failure of Silicon Valley Bank but is up nearly 9% since then. Regional bank stocks have outpaced the broader financials sector since their low in early May following additional bank failures and are up 15% since then. Now the IXM is nearly all the way back to even for 2023. While that’s far behind the broader market, a return to traction in financials would potentially bode well for Wall Street, as their absence from the rally raises concerns about the tenacity of this upswing. Financials remains among a handful of sectors with a majority of its member stocks trading below their 200-day moving averages. And the adage is that it’s hard to have a rally without financials.

Calendar

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.

July 13: June Producer Price Index (PPI), and expected earnings from Conagra (CAG), Delta Airlines (DAL), and PepsiCo (PEP).

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

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