The reflex market reaction to the mild payroll disappointment has Treasury yields lower with growth equity sectors outperforming value. But with almost every other report signaling strong end-market demand, today’s reaction is unlikely to have much staying power.
Today’s ADP jobs report for May was very strong with private payrolls up +978,000 vs. consensus for +623,000. The correlation between ADP private payrolls (typically precedes the official BLS monthly Jobs Report by two days) is positive, but not strong.
Friday’s release of May Nonfarm payrolls will be the last major employment report into the June 15-16 FOMC meeting. The Fed has recently pointed to a sluggish labor market recovery as a reason to defer conversations about tapering asset purchases.
Potential headwinds include: 1) the Fed’s tapering conversation could become an equity headwind if expectations shift forward (consensus looking for a November start). Markets will pay close attention to the June 16 FOMC policy announcement for clues;
Yesterday, we covered expectations for large cap banks to increase buybacks after June stress test results (late June). The increases should be significant and positive for the group in the near-term, but we prefer smaller regional banks with an ability to give shareholders a return
The new focus on Fed tapering has mixed implications for markets. The near-term implications are net positive as the conversation reduces investor concerns for a Fed policy mistake.
The S&P 500 has been rangebound since early-April with leadership shifting between growth and value sectors. The recent, mild softening in US economic data has 10-year Treasury yields retracing to support near ~1.55% and equity investors shifting back to a growth/Tech bias.
Last week’s pickup in Eurozone flash PMI data has the region looking like a complimentary growth engine to the US expansion. The Eurozone doesn’t have the same kind of fiscal stimulus but has a much larger bounce coming from its reopening.
Momentum is a popular input for the vast majority of systematic factor models. As the economy continues to recover, the 12-month momentum factor will begin picking up more and more value sector correlation as the worst days of value performance fall out of the 12-month
PMI is a forward-looking diffusion index with levels above 50 implying expansion and levels below implying economic contraction. The distance on either side of 50 is a measure of velocity.
