May Job Flowers Didn't Sprout, Pressuring Market As Fed Impact Mulled

Today’s much weaker-than-expected May jobs report is getting a positive read by many as more evidence that the Fed can go ahead and cut rates. However, keep in mind that a rate cut means the economy is slowing, which isn’t necessarily a good thing.

The U.S. job creation machine sputtered last month, with just 75,000 new positions added. That was about 100,000 below analysts’ expectations, and, combined with downward revisions to past reports, helps paint a less booming picture of the economy.

Going into the jobs report, many analysts were looking at the possible impact on Fed thinking. A really strong number, one school of thought suggested, might make the Fed less willing to consider a near-term rate cut. A number like 75,000, however, along with wage growth that edged down slightly from April, probably isn’t something that would stand in the Fed’s way. That doesn’t mean a rate cut is for sure, but it arguably removes one possible barrier. We’ll have to wait and see.

Remember, this report isn’t about the economy losing jobs. It’s just not creating jobs like it was. This appears to be a slowing economy, not one that’s going backward. The Fed is probably going to take all of this into consideration.

Stocks, which had been edging up before the report, turned the other way in pre-market trading after the numbers came out. Considering the week’s huge rally, it wouldn’t be too surprising to maybe see some profit taking today, especially when the jobs number failed to impress. On the other hand, some investors might see the report as positive because it doesn’t stand in the way of a rate cut. This means some choppy trading might be ahead.

Looking more closely at the data, there were some thing to like. Wages still grew 3.1% from a year ago in May, and unemployment stayed at 3.6%, but jobs in key areas like construction and manufacturing barely rose. The manufacturing aspect, however, could be seen as positive. If the tariffs on China were really having a major impact, one argument goes, manufacturing jobs would be falling, not flat.

The Labor Department chopped its previous March and April job growth numbers by a combined 75,000, putting a less bullish spin on those two months and bringing average three-month job growth down to 151,000. That’s still decent, but definitely not quite as good as many analysts had been thinking. It’s also well below last year’s 223,000 a month average, which arguably wasn’t going to be sustainable in the long term.

Business and Professional Services was the leading job growth category in May, with 33,000 new jobs. Health care followed with 16,000, but only 4,000 construction jobs were added in May. This could partially reflect bad weather around much of the country that month, so we’ll have to wait for the June report to see if things bounce back in that category.

If jobs growth is slowing down a bit, that wouldn’t be the most shocking thing ever. We’ve had year after year of impressive gains, and unemployment is at 50-year lows. At some point, hiring likely would ease. It doesn’t necessarily mean the economy is struggling, and it’s always important not to take away too many conclusions from just one month of data.

However, it could raise concerns about whether some companies might be pushing the brake on hiring amid concerns about trade wars with China and Mexico. It could also cause worries about the availability of qualified people in the workforce. The latest Job Openings and Labor Turnover Survey (JOLTS) report showed almost 7.5 million jobs that needed filling. If employers aren’t filling these, it could mean they can’t find the right people. When that happens, wages can sometimes rise quickly, perhaps creating some inflation pressure.

Staying Power for Rally

Some people worried that Tuesday’s massive rally might be a one-hit wonder, but it ended up having some staying power as two more days of solid gains followed. Stocks chopped around for a while Thursday before shooting higher in the afternoon amid hopes of a possible delay of U.S. tariffs against Mexico. That situation remains fluid and could change on a dime, judging from how things have gone with other recent tariff battles. In other words, investors probably shouldn’t count chickens before they hatch.

Despite Thursday’s rally, a couple of areas just can’t seem to get going. We’re looking at you, retail and small-caps. The small cap Russell-2000 (RUT) actually lost ground Thursday, which could be a sign of some investors feeling a bit better about the overall market and seeking international exposure in some of the large-caps rather than buying domestic companies. 

It might go back to the pent-up demand for Financials discussed here the other day. There’s still apparently some distrust in where this rally might be going, but if things look positive, maybe people will be coming for the bigger Financials, not the smaller domestic ones that make up a big part of the RUT. Six months ago, small-caps were a popular move for many investors who feared tariffs. Now it looks like people who are afraid just go straight to fixed income. If people think things are going to hell in a handbasket, it seems like they don’t want to build their portfolio around small stocks.

Retail in a Rut

Retail can’t get out of its own way, for the most part. The sell-off there just won’t stop, with some big names like JW Nordstrom JWN, Kohl’s Corporation KSS, and Macy’s Inc M taking a big hit on Thursday. It’s been a tough go for M these last few years. The company has made a concerted effort to get rid of some of its real estate, but it’s hanging around its neck like an albatross. They’re cutting prices, but that can hurt margins, and their online business isn’t growing fast enough to keep up with margin cuts at their brick-and-mortar stores.

Generally around the entire retail industry, it’s surprising to see how big recent price cuts have been. Across the board, you’re seeing pain in the retail space as mall traffic pulls back and competition grows.

Volatility continues to ease this week, with the Cboe volatility index (VIX) falling below 16 Thursday for the first time since May 23, down from recent highs above 19. This could be a sign of positive sentiment building in the market, though VIX remains well above April lows near 12. The VIX relaxation might be a temporary phenomenon, as volatility sometimes starts to climb ahead of Fed meetings. The next one of those takes place June 18-19.

Looking Ahead to Next Week

Speaking of what’s to come, next week brings the latest tidings on inflation. Producer prices for May are due Tuesday, followed by consumer prices on Wednesday. April’s producer and consumer prices rose 0.2% and 0.3%, respectively, but core consumer prices excluding food and energy rose just 0.1%. We’ll talk more next week about what analysts expect the May numbers to show and how those might conceivably impact the Fed’s thinking.

Another interesting data point next week is the April JOLTS report, due Monday. Job openings have been hitting new record highs almost every month recently, and when companies can’t fill jobs, wages often have to rise. 

As you might expect between earnings seasons, the earnings calendar looks a bit thin next week. Possible standouts include lululemon Athletica Inc LULU on Wednesday and Broadcom Inc AVGO on Thursday.

Meanwhile, in the Treasury market, the 10-year yield finished Thursday at 2.12% for the second-straight day. That could be a sign that the market might be carving a bottom in yields. Any move upward in yields would likely be viewed as a sign of improved investor confidence in the economy.
 
FIGURE 1: RUT LAGS: Small-cap stocks, represented here as the candlestick by the Russell 2000 (RUT) index, haven’t been able to bounce back as well as the large-cap S&P 500 Index (purple line) this week. Investors’ embrace of large caps might be a sign of more economic optimism. Data Source: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Trading With Blinders: One more corporate note worth mentioning from Thursday is the performance of some of the biggest Energy companies—Exxon Mobil XOM and Chevron Corporation CVX. Shares of both rose early Thursday despite a drop in crude prices, which didn’t seem to make much sense. Then around midday, crude rallied 3%, helped in part by the Mexico news. All along, XOM and CVX didn’t waver. For those paying attention, those two names were telling people something about the market.

What lesson can investors take away? Sometimes people trading a stock just look at the stock, but trading is all about relationships, and you really should consider watching those. If you generally look at commodities, for instance, you also might want to pay attention to stocks correlated with them. Or some people might say, “I only trade Apple Inc AAPL,” but what about the AAPL supplier stocks that often can tell investors something about how AAPL might be doing? People too often have blinders, but someone going blindly into crude on Thursday without looking at CVX and XOM might have gotten burned.

Cooking With Caution: An interesting note this week on the sector side is that even though cyclicals are getting a bid, so are some of the more defensive areas like Consumer Staples and Real Estate. This could hint that investors aren’t universally ready to drop the “risk-off” attitude they generally held going into the week. That said, the way the Treasury market has rallied lately, it’s likely a lot of money now sits on the sidelines, and could be put back into stocks if people start feeling optimistic. However, yields continued to get leaned on Thursday. That could be the real key to getting a sense if this rally has some wind behind it. If yields start climbing and Staples and other “defensive” areas lose ground, that could tell investors things are turning around. The rally in crude on Thursday could be another sign.

Tough Times in Texas?: Energy shares got a boost Thursday as crude prices bounced back, but the sector as a whole entered Thursday down 1.5% over the last three months. The results get a little more lumpy when you look closely. The big players in oil, gas, and consumable fuels are down a combined 1.4% over that time frame. It’s the upstream energy, equipment, and services sub-sector that’s really suffering, down more than 10% over the last three months and down 42% over the last year. Worries include falling economic demand, rising U.S. stockpiles, and concerns about how potential tariffs on Mexico might affect the drilling industry. That’s why it could be interesting next month to listen to some earnings conference calls from that sub-sector, including Schlumberger NV SLB and Halliburton Company HAL.

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