Markets Blog
David Matzko, LPL Research
Weekly Market Performance for the week of June 3, 2024. U.S. stocks notched their sixth weekly gain in seven, weathering a Friday dip caused by strong jobs data and higher bond yields. Technology led the charge on the week, particularly fueled by NVIDIA's pre-stock-split momentum. Bonds also managed to extend their recent run higher but did give a large share of the weekly gains back on Friday after the May jobs report, as the strong data calls into question the scope and timing of potential rate cuts from the Federal Reserve (Fed). Next week brings a data-heavy agenda for the bond market, including inflation figures (Consumer Price Index (CPI)), a key Fed meeting, and a hefty $120 billion in Treasury auctions.
Index Performance
U.S. and International Equities
Markets: U.S. stocks rose for the sixth week in seven, withstanding Friday’s jump in yields after the stronger-than-anticipated jobs report that left markets a bit wobbly late in the week. It's hard to say which was bigger news — NVIDIA’s (NVDA) plans for a new chip and a 10-for-1 stock split (effective at Friday’s close) or “Roaring Kitty” making his public comments about GameStop (GME) for the first time in three years. What is quite clear is NVDA was more of a factor in driving the S&P 500 about 1.5% higher for the week (as of 3:00 p.m. ET) and propelling solid outperformance by the Nasdaq and the Russell 1000 Growth Index over its Value counterpart. Small caps lagged as the Russell 2000 Index fell about 3% for the week.
NVIDIA’s strength was a key driver of technology leadership over the past five trading days, but well-received earnings from Hewlett Packard Enterprise (HPE) added to the market’s enthusiasm about artificial intelligence (AI) data centers. The second-best sector performer for the week, communication services, is also technology-heavy and benefited from solid gains by Alphabet (GOOG/L) and Meta (META). On the other end of the spectrum, energy and utilities were the biggest laggards. Oil was hurt by lower oil prices after OPEC+ failed to offer much support to begin the week. Utilities sold off on Friday’s rate increase, but the main driver of the weakness was traders backpedaling their bets on AI-fueled power demand. For the week, Vistra (VST) shares fell about 14% and Constellation Energy (CEG) lost more than 8%.
It was also a big week of news outside the U.S. with the European Central Bank (ECB) cutting interest rates Thursday, as expected, for the first time since 2019, which followed the same from the Bank of Canada the day before. Markets didn’t move much on that news, but the mostly technology-light European indexes managed gains of near 1%. Global markets reacted more strongly to some surprising political developments. India's election left Prime Minister Modi with less of a mandate for his pro-growth, pro-investment policies, though that market proved resilient amid the volatility to end the week higher. Meanwhile, in contrast, Mexico’s election result witnessed the country’s first female leader, but markets worried the landslide victory would push the country too far left without checks and balances and sent the peso tumbling and Mexican stocks down double digits for the week, though that didn’t stop the MSCI Emerging Markets Index from producing a solid gain over the five trading days.
Fixed Income: Despite the sell-off on Friday due to the strong jobs number, the Bloomberg Aggregate Bond Index finished higher this week. Intermediate to longer-maturity Treasury yields were lower by 0.07% to 0.10% on the week. Next week is a busy one for markets, with the CPI, Fed and nearly $120 billion of Treasury securities set to get auctioned off.
Our 2024 yearend target for the 10-year is 3.75% to 4.25% and acknowledge we could be higher than those levels until later this year. We think rate cut pricing has become overly negative both in terms of the number of cuts this year as well as the total number of cuts expected throughout this rate cutting cycle.
Leveraged credit markets (bank loan (BL) and high yield (HY) bond markets) continue to outperform most higher-quality fixed income markets, but distress in the BL market continues to percolate under the surface. While there were no actual defaults in May (Ch.11, missed interest/principal payments) for the first time since December 2022, distressed exchange activity was the third-largest monthly total on record. As such, HY bond default rates declined to a 14-month low, whereas BL default rates rose to a nearly three-year high.
HY bond spreads remain unattractive, and with 62% of the BL market trading above par, or a mere 2% off record highs, we think further price appreciation is limited. However, all-in yields for both asset classes remain above historical averages.
Commodities: The broader commodities complex traded lower this week as Friday’s better-than-expected payrolls print pushed yields and the dollar higher. The Bloomberg Commodity Index (BCOM) slid around 1% before finding support close to the 200-day moving average (dma). Despite the pullback, the technical setup for BCOM remains constructive as evidence for a bottom is building. A close above resistance near 108 would validate a breakout and imply a new uptrend is underway.
The dollar bounced off key support near 104 and edged modestly higher on the week. An arguably hawkish rate cut from the ECB put upward pressure on the euro and weighed on the greenback. Technically, a close above 105.15 would reverse the dollar’s short-term downtrend and negate the developing head and shoulders top formation, while a close below the neckline at 104 would complete the pattern and imply downside risk toward at least 101.50.
Industrial metals underperformed precious metals as zinc and nickel dropped over 5%. Copper fell 2% and closed near an uptrend support line and its rising 50-dma. Gold shed over 2.5% with a notable bearish engulfing candlestick on Friday that leaves the yellow metal vulnerable to retesting downside support off the May lows ($2,277).
Natural gas was a bright spot this week as futures jumped over 12%. Expectations for increased cooling demand offset a larger-than-expected storage build. Momentum in the rally off the spring lows continues to build, paving the way for a potential retest of the late 2023/early 2024 highs. West Texas Intermediate (WTI) slid 1.5% despite an intraweek relief rally off oversold levels. Clarification from OPEC+ surrounding their latest production cut extension supported the rebound, as the oil cartel noted they could adjust the planned output increase schedule for later this year.
Agricultural and livestock markets traded lower this week. A pullback from overbought levels in wheat led grains lower, while cocoa added over 7% and led softs higher. Severe supply disruptions in West Africa have helped underpin an impressive 137% rally in cocoa this year.
Economic Weekly Roundup
Nonfarm payrolls for May came in a bit hot. Payrolls grew by 272,000 in May after a downwardly revised gain of 165,000 the previous month, well ahead of expectations near 180,000. The unemployment rate rose slightly to 4% and the long-term unemployed accounted for roughly 21% of all unemployed individuals. Government employment rose by 43,000 as state and local governments continued to fill openings. Payrolls fell in department stores as consumers continue to shun brick-and-mortar stores in favor of online shopping.
The average workweek was 34.3 hours in May, unchanged from the previous month and matches the pre-pandemic workweek. Finally, average hourly earnings rose 4.1% from a year ago, slightly faster than the annual rate in April, putting upward pressure on yields.
Bottom line, markets were a bit surprised with the strong payroll report as yields spiked. The hot labor report pushes the Fed to give even greater focus to next week’s CPI release as officials consider when the economy is ready for a rate cut. At this point, not yet. This jobs report solidifies the Fed’s resolve to stay on hold. The next layer of analysis should be on wages, as much of this year’s payroll gains were on lower-paying jobs.
Mixed Institute for Supply Management (ISM) Services report for May. The report indicated the retail sector said the “slowdown in [the] economy being felt” but other sectors such as restaurants and hotels are seeing stable growth. Construction firms are telling us that cost of capital is rising, making ‘build to rent’ projects more difficult. Services employment contracted for the fifth time in six months. The most concerning element of the report was prices paid by services organizations rose for the 84th consecutive month, but at least the pace is not as fast as last year. Utilities, transportation, and warehousing sectors are growing amid a slower economic outlook. New orders in these sectors are still posting solid demand.
Bottom line, prices paid by services organizations are still rising, but at least the pace is slowing. We continue to notice several sectors holding off on filling vacancies.
Job openings and labor turnover report consistent with easing wage pressures. The April quits rate remained below pre-pandemic levels as workers were less inclined to quit their jobs. Turnover in the job market has stabilized as both the headline hiring rate and the quits rate were unchanged from the previous month. On a more granular level, hiring in the transportation, warehousing, and utilities industries experienced an uptick amid solid demand for these services. Healthcare also had an uptick in hiring rates.
Bottom line, the openings-to-unemployed ratio declined to 1.24, matching pre-pandemic levels and revealing a loosening labor market. This metric was specifically called out by Fed Chairman Jerome Powell in his warnings about a tight labor market. But now, investors should likely notice some easing in wage growth in the coming months. Overall, this report suggests wages will not likely create inflationary headwinds throughout the balance of 2024.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: New York Fed 1-year Inflation Expectations (May)
Tuesday: NFIB Small Business Optimism (May)
Wednesday: MBA Mortgage Applications (Jun 7), CPI (May), CPI Ex food and energy (May), Real Avg Earnings (May), Federal Open Market Committee (FOMC) rate decision (June 12), Interest on Reserves Balances Rate (June 13), Monthly Budget Statement (May)
Thursday: Initial Jobless Claims (June 8), Continuing Claims (June 1), PPI (May final), PPI ex food and energy (May), PPI ex food, energy, and trade (May)
Friday: Import Price Index (May), Import Price Index ex petroleum (May), University of Michigan Sentiment (June)
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