Debt Ceiling Vote Passes In House, Cheering Wall Street Ahead Of Tomorrow's May Jobs Report

(Thursday market open) The new month begins with stocks on the rise after the United States edged one step closer to moving past the debt ceiling debate.

Last night, the House of Representatives passed a bill to raise the debt ceiling by a strong bipartisan vote of 314–117. The Senate is expected to begin consideration of the bill today. One thing to keep in mind is that the timeline is very tight because any single senator can use a variety of procedural maneuvers to delay consideration of the bill. However, the Senate is reportedly working to expedite the process. A final vote is possible as soon as tomorrow.

Once the Senate passes the bill, the president will sign it into law, Treasury can begin borrowing again, and the debt ceiling issue will be off the table until mid-2025. Bottom line: Congress is on track to pass the bill before the default date.

For more Schwab insight on the debt ceiling debate, the voting process, and potential market reaction, read our latest government policy analysis. Volatility eased this morning, but it’s worth watching as the market remains focused on the legislative process in Washington.

Moving on, Friday’s May Nonfarm Payrolls report, due out an hour before the opening bell, could provide a distraction from all the debt ceiling headlines.

The jobs data will tell investors more about the economy’s health and provide clues into the Federal Reserve’s next move. Analysts forecast healthy jobs growth of nearly 200,000 but believe wage growth might have moderated from April. Tomorrow’s report comes after Wednesday’s April job openings data flashed hotter than analysts had expected.

Despite yesterday’s job openings data, the market’s now building in higher odds of a Fed rate pause later this month. This represents a reversal from earlier this week when futures trading indicated a better than 60% chance of a 25-basis-point rate hike. The sentiment change came after Fed Governor Philip Jefferson hinted in a speech that the Fed is considering leaving rates alone at its June meeting to assess the impact of all the hikes so far, according to media reports.

Morning rush

• The 10-year Treasury note yield (TNX) edged up 2 basis points to 3.65%.
• The U.S. Dollar Index ($DXY) slipped to 104.04 but remains near two-month highs.
• The Cboe Volatility Index® (VIX) futures eased to 17.35.
• WTI Crude Oil (/CL) rose slightly to $67.80 per barrel but remains near four-week lows.

Despite info tech sector weakness on Wednesday, the tech-focused Nasdaq 100® (NDX) had a very solid month of May, rising more than 7%. That easily outpaced the S&P 500® Index (SPX), which gained just a fraction of a percent during the month.

A risk-off sentiment took hold yesterday, sending tech and energy shares lower while “defensive” sectors like health care and utilities topped the leaderboard. This might have reflected month-end profit taking and people exiting the market ahead of the debt ceiling vote. It also shows a little air coming out of the artificial intelligence (AI) trade following last week’s massive rally.

What to watch

Career path: Data and earnings so far this week don’t hold a candle to Friday’s 8:30 a.m. ET May jobs report. Here’s what Wall Street analysts expect, according to Briefing.com:

• Nonfarm payrolls: 190,000, versus 253,000 in April
• Average hourly earnings: +0.3% month over month, versus 0.5% in April
• Unemployment: 3.5%, versus 3.4% in April

If headline jobs growth is near the expected 190,000, that would be well below the 2023 monthly average of 284,500. Only the March report, with 165,000 jobs created, was lower. Look for possible revisions to March and April in the May report. The government made significant downward revisions to previous reports last time out.

Another stat to watch is labor force participation—which was steady at 62.6% in April and recently clawed back to prepandemic levels. Rising participation hints at less competition to find workers. In the long run, that might temper inflationary wage growth.

The Fed is likely watching wages closely. If tomorrow’s report shows higher-than-expected wages, watch the rate-sensitive 2-year Treasury note for a possible reaction.

Spring slowdown: The May Chicago Purchasing Managers Index (Chicago PMI) laid an egg yesterday with a headline number of 40.4, down from 48.6 in April and well below expectations. Anything below 50 is considered contraction. This raises new questions about U.S. manufacturing health ahead of today’s May ISM Manufacturing Index, due soon after the open. It’s been in contraction territory below 50 going back to last October. Analysts expect that to remain the case, projecting a headline of 47, down from 47.1 in April, Trading Economics says.

Just in

For a change, this morning’s jobs data came in just as expected. Weekly initial jobless claims of 232,000 was just 1,000 under Wall Street’s consensus, according to Briefing.com. The number is in the middle range of recent reports, and probably isn’t especially market-moving.

The ADP Employment Change for May also came out today at 278,000. However, government data and the ADP data haven’t been tightly correlated the last few years.

Across the Pacific, the Caixin China General Manufacturing PMI unexpectedly rose to 50.9 in May 2023 from 49.5 in April. Output rose the most in 11 months, new order growth was at 2 year-high, and foreign sales continued to increase, Trading Economics reports. Over in Europe, core inflation in May slowed more than expected, to 5.3%, but remained well above the European Central Bank’s (ECB) 2% goal.

Stocks in the Spotlight

Shares of cloud-based software maker Salesforce CRM fell in premarket trading after the company posted a better-than-expected quarter but faced higher costs and didn’t raise its full-year revenue outlook. A company executive told Barron’s that Salesforce continues to see difficult macro conditions.

Quarterly reporting moves along this afternoon with expected results from semiconductor maker Broadcom AVGO. Shares went on a tear last month amid excitement over the company’s orders from major tech firms like Apple AAPL and Meta Platforms META.

In its last earnings report, Broadcom easily beat Wall Street analysts’ forecasts and delivered better-than-expected guidance. Keep an eye on any updated guidance in the wake of Broadcom’s recent deals. The market punished Salesforce for not being more optimistic in its outlook.

Eye on the Fed

Chances of a rate pause at the June meeting stand at 70% as of this morning, according to the CME FedWatch tool.  That’s up from 48% a week ago. As noted above, chances of a pause gained traction following Fed Governor Jefferson’s speech yesterday. In addition, Philadelphia Federal Reserve President Patrick Harker suggested the Fed might “skip” a rate increase, but implied it could tighten rates more in future meetings if necessary.

With less than two weeks until the decision, it’s unusual to see this kind of quick reversal in the market’s expectations. It still feels like the pendulum could keep swinging, perhaps right up until the week of the meeting. Especially considering the jobs report tomorrow and the May Consumer Price Index (CPI) report due the very day the Federal Open Market Committee (FOMC) begins its June 13–14 meeting.

Thinking cap

Ideas to mull as you trade or invest

Outlook alert: On a troubling note, 63 S&P 500 companies have delivered negative Q2 guidance, versus 41 that posted positive guidance, according to FactSet. The SPX had a forward price-earnings (P/E) ratio of just under 18 at the end of last week—below the five-year average but above the 10-year average of 17.3. In the long run, earnings tend to drive stock prices, and if earnings don’t grow, it’s hard to have a prolonged rally on Wall Street when the P/E is already elevated. Analysts predict a 6.3% year-over-year drop in Q2 earnings per share, FactSet says, and a 1.3% rise for the full year.

Working for a living: The April Job Openings and Labor Turnover Survey (JOLTS) report didn’t deliver what bullish investors had hoped. The number of openings rose to 10.1 million, up about 358,000 from a month earlier. It was also stronger than the 9.5 million openings analysts expected. The JOLTS number suggests the labor market remains strong, perhaps stronger than the Fed would prefer as it continues efforts to further tamp down inflation. In the long run, all this competition for workers could force companies to offer higher wages and then perhaps raise prices. Labor continues to be the center of the U.S. inflation equation now that goods price growth has slowed.

Foreign affairs: The dollar reached new 2½-month highs Wednesday after both Europe and China released disappointing economic data. This could reflect ideas that non-U.S. central banks might push pause on rate increases, which could lower the value of non-U.S. currencies versus the greenback. For the same reason, it’s interesting to see U.S. Treasury yields sink this week, though overseas data may only be a small reason for that. Treasury yields came under pressure from soft U.S. data and ideas that risk of a U.S. default was off the table. However, if the slide in U.S. Treasury yields continues, it could provide clues into global money flows. When foreign economies slump, overseas investors often put cash into the dollar and U.S. fixed income, believing that the U.S. economy is the best house on a bad block. Current 16-year highs in U.S. interest rates are more potential pollen if you’re an overseas investor sniffing for yield. It’s not a trend yet, but if it becomes one, this could mean better borrowing conditions for U.S. companies and consumers as rates fall amid the influx of foreign cash.

Calendar

June 2: May Nonfarm Payrolls

June 5: April Factory Orders and May ISM Non-Manufacturing Index.

June 6: No major earnings or data.

June 7: April Trade Balance and April Consumer Credit and expected earnings from Campbell Soup (CPB).

June 8: April Wholesale Inventories.

 

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

 

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