Markets took last week’s economic data as Goldilocks in that it showed a sudden drop in some inflation metrics and (mostly) stable growth, and markets keyed off that and some dovish Fed speak to spark a rally that sent the S&P 500 to fresh YTD highs. The key positive catalysts for markets all came on Thursday and Friday, and the biggest one was Friday’s jobs report, which was, to put it mildly, confusing.
On the headline, the job adds number was “Too Hot” as we saw 339k job adds vs. (E) 190k, a level well above our 300k “Too Hot” threshold. However, underscoring the confusion in this report, the Household survey showed -310k job losses, offering a conflicting and confusing counter to the strong headline reading. The fact that the unemployment jumped to 3.7% from 3.4% (a welcomed sign by the Fed) and that wages rose.
Friday’s rally really started on Thursday, however, thanks to two inflation indicators that dropped sharply. The ISM Manufacturing Prices Paid Index fell to 44.2 vs. (E) 52.3, while Unit Labor Costs, a metric of employment costs, rose just 4.2% vs. (E) 6.3%. Those reports started the late -week rally on Thursday, as investors welcomed the anecdotal evidence that inflation was starting to more quickly recede, something that would solidify the Fed’s pause on rate hikes and bring us closer to a pivot.
Meanwhile, growth metrics stayed reasonably steady (mostly). The May ISM Manufacturing PMI was essentially in line with expectations at 46.9 vs. (E) 47.0 (not a good reading, but no worse than feared). Additionally, jobless claims were in line with expectations at 235k. Bottom line, last week’s economic data hinted at the possibility of 1) A sudden drop in inflation and 2) Stable growth and combined with a market that’s still prone to chasing it helped the S&P 500 rally to new highs.
This Week This week is the proverbial “calm” before next week’s potential “storm” of data (next week we get the May CPI and the June FOMC decision). But while there aren’t many potentially market-moving reports this week, the few that do come are still important. To continue last week’s Immaculate Disinflation rally, markets will want to see 1) Stable data and 2) Further steep drops in price pressures. Bottom line, Goldilocks economic data that raised hopes for Immaculate Disinflation pushed stocks to fresh highs last week, and it’ll take more of that to fuel a run to, and through, 4,300.
Finally, there is a lot I am not telling you about the risks in the market. I don’t want to confuse the issue. We are almost fully recovered from COVID melt down, but the lingering problems is that productivity is not improving, and the markets are a bit overdone from the data that is being released. For that reason, we will remain defensive and hope that there is a shift to value and small caps as the markets digest the lack of real growth. I think we are perfectly positioned for all the data that is coming out.
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