Major U.S. equity indices have continued to trade in narrow trading ranges, although last week featured the daily highs and lows expanding to an extent.
Nearly all of last week’s equity strength came on Friday after the release of the most recent employment data. It’s also worth noting that last week featured more regional banking woes, which I discuss in further detail below.
Tallying results from last week, the S&P 500 decreased by 0.80%, the Nasdaq 100 added 0.10%, and the Dow Jones Industrial Average declined by 1.24%.
Strong Jobs Report
Nonfarm payrolls rose by 253,000 in April, beating Wall Street’s estimates for job additions of 180,000. The labor market data surprised market participants to the upside, given recent clues of a slowing labor market.
Job creation was broad-based in April, with the biggest gains in professional and business services (43,000), health care (40,000), and leisure and hospitality (31,000).
The unemployment rate ticked down slightly to 3.4% in April from 3.5% in March.
Market Reaction: Is Good News Good Again
Major U.S. stock indexes rose sharply off the jobs data, though positive Apple earnings from the evening prior did help the rally.
Here is what’s interesting and had market participants mesmerized all day last Friday: For a long time, starting around when the Federal Reserve began raising interest rates, good news has been bad, and bad news has been good.
In the past, a surprise jobs number showing more job creation would have indicated that the Fed had not sufficiently slowed the economy and interest rates would need to go higher. Traders have been selling such events for a while now.
However, we got the opposite reaction last week, with major U.S. stock indexes pushing higher after the surprise increase in jobs–and the Dow having its best day since Jan 6th. What’s changed?
Perhaps traders and investors do not collectively believe the jobs data is reason enough for the Fed to hike again. Bear in mind, the market had already favored a pausing Fed at the next meeting. The jobs data was viewed as Goldilocks-like last week–just right.
Here is what we know so far: traders did not sell stocks aggressively on the surprising jobs data. The jobs report came out two days after the Fed hinted at a possible pause in rate hikes. The market seems to believe the Fed is done hiking. Could good news be good news again?
Fed Rate Hike, Hint of Pause
As expected, the Fed did raise the benchmark interest rate last week by 25 basis points. The tenth consecutive rate hike of the Fed’s campaign brings the U.S. benchmark interest rate to a range of 5.00% – 5.25%.
Amid the turmoil in regional banks, the Fed hinted that their rate hike crusade might be nearing an end, with a rate hike pause in sight.
Judging by the way the markets traded on Friday’s big jobs data and the CME Fedwatch Tool (as of Monday morning) showing an 88.0% probability of a pause at the June meeting and a 60.3% chance of a pause in July, the market seems to believe the Fed.
There is also a 33.6% chance (as of Monday morning) of a 25-basis-point rate cut in July, according to the CME Fedwatch Tool.
Regional Bank Woes
Banking concerns continued last week after the collapse of First Republic Bank.
Other banks have been feeling stress, too, including PacWest Bancorp (NASDAQ: PACW) and Western Alliance Bancorporation (NYSE: WAL).
However, as the broader markets rallied last Friday, we saw extreme price volatility in these two names, with PACW increasing by 81.7% last Friday but decreasing by 43.25% for the week. Similarly, WAL tacked on 49.23% last Friday but finished lower by 26.83% for the week.
While the broader stock indexes have been trading in narrow ranges, there has been plenty of volatility in the regional banking space.
Nobody knows if another event is on the horizon in the regional banking space, but we are all tuned in with full attention.
Debt Ceiling Deadline
On Sunday, Treasury Secretary Janet Yellen said the failure to raise the debt ceiling will cause a ”steep economic downturn.”
She has warned that in early June, there will be a day when the U.S. won’t be able to pay its bills. Special accounting measures have been used to keep the U.S. solvent as the debt ceiling deadline approaches.
The president is scheduled to meet with congressional leaders on Tuesday to discuss a deal to raise the debt ceiling.
Inflation Data on Tap
It is that time of the month. Once again, we are due for the monthly check-in on inflation via the Consumer Price Index (CPI) and perhaps the more widely watched Core CPI.
For the May release ( of April data), preliminary estimates are for a 5.0% year-over-year rise in headline CPI, which would be identical to March’s data. Month-over-month, prices are expected to rise by 0.4%.
For Core CPI (which strips out volatile food and energy), a 5.5% year-over-year rise is the forecast. This would be a tick lower than the 5.6% result in March. 0.4% month-over-month is the estimated rise for Core CPI.
It is safe to say that market participants will be paying attention to the market reaction on CPI day since we saw a rather “opposite reaction” to the recent trading narrative to the jobs data last Friday.
Last week was somewhat of a tug-of-war, with stock index bears having control early in the week and bulls feeling energized post-Fed and amid strong labor market data. Fed comments hinting towards a pause, positive results from Apple, and the healthy jobs report were all market catalysts. Regional banking turmoil remains on the radar.
This week’s economic data calendar features CPI on Wednesday, producer pricing on Thursday, and the University of Michigan Consumer Sentiment on Friday. Market reaction to the data will be in focus after last week’s deviation from the recent norm.
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