Pressure cooker
Main U.S. indexes end red, but off lows: Nasdaq down 0.63%
Energy weakest S&P 500 sector; defensive groups post gains
KBW regional banking index ends down 3.25%
Dollar, gold up; crude, bitcoin decline
U.S. 10-Year Treasury yield falls to ~3.64%
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PRESSURE COOKER (1602 EDT/2002 GMT)
U.S. stock indexes fell on Wednesday as a deal to raise the nation's debt ceiling headed for a crucial vote by lawmakers, while unexpectedly strong labor market data reinforced bets of another interest rate hike by the Federal Reserve.
Additionally, markets digested more Fed speak.
In remarks that leaned toward what some have called a "hawkish pause," Fed Governor and vice chair nominee Philip Jefferson said "skipping a rate hike at a coming meeting would allow the (Federal Open Market) Committee to see more data before making decisions about the extent of additional policy firming."
Philadelphia Fed President Patrick Harker also said on Wednesday that for now he is inclined to support a "skip" in rate hikes.
Despite building anxiety over the vote and rates, and a near 1% slide into its mid-morning low of 4,166.15, the S&P 500 .SPX managed to rebound to end down around 0.6% at about 4,180. Thus, the weekly cloud, which is now support at 4,155, is so far proving resilient.
For the month of May, the SPX gained about 0.3%, bringing its YTD rise to 9%.
Tech .SPLRCT led the way in the month, gaining more than 9%, while energy .SPNY took the biggest hit, falling nearly 11%.
Here is a snapshot of where markets stood just moments after the closing bell:
(Terence Gabriel)
*****
HEADING INTO LABOR: A DATA PREVIEW (1325 EDT/1725 GMT)
Starting with today's surprise jump in job openings, this week is lousy with employment data.
While the March JOLTS report, with its unforeseen spike in job openings was somewhat disheartening for those still holding out hope for a Fed pause, it is, as indicators go, ancient history.
Thursday and Friday offer much fresher data for Powell & Co to chew on.
First, ADP's private payrolls number, which has become a slightly more reliable predictor of the Labor Department's official private payrolls print, is expected to show 170,000 job adds in May, marking a 42.6% slowdown from April.
That's in the same general ballpark as the 165,000 consensus for the official print due Friday.
Next, executive outplacement firm Challenger Gray & Christmas offers its planned layoffs report. April's number came in a hair shy of 67,000, the lowest monthly number so far this year.
Even so, announced job cuts from January through April were up a nosebleed-inducing 322% from the same period in 2022, most of it due to high profile layoffs in the tech- tech-adjacent space. Tech has responsible for more than a third of all job cuts so far this year. But last month, the retail sector was hit hardest.
Headcount reductions haven't begun to show up in the other data, possibly because of cushy severance deals or replacement gigs have been easy to find.
Economists expect a slight uptick in weekly jobless claims, to 235,000 from the prior week's 229,000, still well within the range associated with healthy labor market churn.
But the main event happens Friday, with the May employment report.
Nonfarm payrolls are seen falling nearly 25% to 190,000 and the unemployment rate ticking higher to 3.5%.
It should be noted that payrolls more often than not surprise to the upside. Eleven of the twelve most recent employment reports have delivered more job adds than expected.
Average hourly earnings - a closely-watched inflation driver - are expected to cool on a monthly basis to 0.3% from April's 0.5%, but year-on-year wage growth is seen holding steady at 4.4%.
(Stephen Culp)
*****
ONCE OVER DEBT LIMIT SCARE, IT'S BACK TO INFLATION FIGHT ANGST (1155 EDT/1555 GMT)
If all goes as planned, the House of Representatives is expected to vote the "Fiscal Responsibility Act of 2023," later on Wednesday. The process would then move on to the Senate.
Mike O'Rourke, chief market strategist at JonesTrading, is taking note of the fact that as markets cautiously wait on the debt limit legislation, the only area of enthusiasm has been the Nvidia fueled AI mania that has gripped the market.
Once the debt limit scare subsides, O'Rourke thinks that the focus will quickly return to inflation, and to this end, he points to the Fed Funds futures market, which has already begun to price in at least one more 25 basis point rate hike.
O'Rourke turns to two papers released last week by former key Fed officials dissecting the inflation environment over the past two years.
One paper was coauthored by former Fed Chairman Bernanke and the former IMF Chief Economist Olivier Blanchard.
O'Rourke says that Bernanke and Blanchard observed that inflation and labor tightening are the products of strong reopening demand coupled with easy fiscal and monetary policy and with excess savings. Accordingly, the pair expects the tight labor market to continue to grow and fuel inflation in the future.
O'Rourke adds that as it stands, the unemployment rate is still matching its six decade lows, and by this measure, he believes it indicates the Fed still has significant work to do.
The other paper was coauthored by former Fed Vice Chair Don Kohn and Gauti Eggertsson of Brown University.
To O'Rourke, the interesting aspect of this paper is that it highlights that the FOMC's 2020 revision of its policy framework contributed to the inflation environment.
O'Rourke says Kohn and Eggertsson acknowledge that mistakes were made "Because we find that the framework and forward guidance put in place in late 2020 contributed to delayed action and the inflation overshot, we believe there are lessons to be learned for future frameworks and the use of policy tools."
In O'Rourke's view, "This is probably closest example we will ever witness of the Fed being held accountable egregious missteps."
(Terence Gabriel)
*****
KNOCK THREE TIMES: JOLTS, CHICAGO PMI, MORTGAGE DEMAND (1120 EDT/1520 GMT)
They say bad things come in threes.
That certainly was the case on Wednesday, with a trio of indicators offering market participants news from the labor market, factory activity and the housing sector.
First, the number of vacant job openings unexpectedly rose by 3.7% in April to 10.103 million, well north of the 9.375 consensus.
The Labor Department's Job Openings and Labor Turnover Survey (JOLTS) USJOLT=ECI, which gauges labor market churn, also showed new hires picked up a bit while firings and quits both inched a bit lower.
Taken together, the report paints a picture of a still-tight labor market, with decelerating churn.
Combined with an unemployment rate hovering at a half-century low, and corroborating recent surveys such as NFIB Small Business Optimism, lack of available workers continue to put upward pressure on wages, a major inflationary driver.
Even so, the data series does point to some signs of slack appearing here and there.
"The best measure of labor market tightness in the report, the quits rate, fell to 2.4%—its lowest rate since February 2021, almost matching its pre-pandemic rate of 2.3%," writes Julia Pollak, chief economist at ZipRecruiter. "It suggests that the labor market is slackening, despite the reported increase in job openings, and that workers are increasingly sheltering in place in their jobs as better alternatives become less available."
Next, factory activity in the midwest contracted sharply this month.
The Chicago purchasing managers' index (PMI), courtesy of MNI indicators plunged by 8.2 points to land at 40.4.
A PMI number south of 50 indicates monthly contraction, and a print below 43 is widely considered recessionary.
The index has been in contraction territory for nine straight months.
"The outlook for manufacturing is uncertain; Softer demand for goods and higher borrowing costs are constraints on factory output," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "And a further tightening in credit conditions that reduces access to credit could be an additional hurdle going forward."
On Thursday, analysts expect the Institute for Supply Management's (ISM) PMI to show the manufacturing sector remains in contraction nationwide, delivering a reading of 47 - essentially a repeat of the 47.1 April print.
And finally, the cost of financing home loans jumped last week, and would-be borrowers gave the move a thumbs down, according to the Mortgage Bankers Association (MBA)
The average 30-year fixed contract rate USMG=ECI jumped 22 basis points to 6.91%, the highest level since November.
The surge prompted a 2.5% drop in applications for loans to purchase homes USMGPI=ECI and a 6.9% plunge in refi demand USMGR=ECI.
"Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon," says Mike Fratantoni, MBA's chief economist. "While refinance demand is almost entirely driven by the level of rates, purchase volume continues to be constrained by the lack of homes on the market."
Below, we see overall mortgage demand is down about 36% from the same week last year:
Taken together, financial markets are increasingly betting that the Federal Reserve isn't quite finished tightening the screws.
At last glance, CME's FedWatch tool shows a 62.9% likelihood of yet another 25 basis point rate hike next month, up from 36.4% a week ago.
(Stephen Culp)
*****
U.S. STOCKS FEEL THE PRESSURE AHEAD OF PIVOTAL VOTE (1015 EDT/1415 GMT)
Wall Street's main indexes are lower early on Wednesday as a deal to raise the nation's debt ceiling heads for a pivotal vote by lawmakers, while another round of earnings highlighted the pinch of higher prices being felt by corporate America.
On the data front, May Chicago PMI came in below the estimate, while April JOLTS job openings came in above the Reuters Poll.
Additionally, markets are also contending with more hawkish Fed speak from Cleveland Fed President Loretta Mester, who sees no "compelling" reason to wait to implement another interest rate hike.
The main indexes are lower, and a majority of S&P 500 sectors are red. Consumer discretionary .SPLRCD is taking the biggest hit, while just staples .SPLRCS are slightly higher.
Banks .SPXBK, .KRX are among weaker groups.
Of note, it's been a rough May for the energy sector .SPNY. The group is down more than 10% MTD, and on pace for its biggest monthly slide since June of last year. On the other hand, tech .SPLRCT is up about 10% in May.
With this, growth .IGX is tracking its best month relative to value .IVX since July of last year.
Here is a snapshot of where markets stood around 1015 EDT:
(Terence Gabriel)
*****
S&P 500 INDEX: STILL WEDDED TO 4,200 AREA (0900 EDT/1300 GMT)
The S&P 500 index .SPX tried to pull away from the 4,200 area to the upside on Tuesday. However, after hitting an early high of 4,231.10, strength faded and the benchmark index ended up by just decimals at 4,205.52:
With the push above 4,218.70, the SPX was able to finally fill its August 22 gap. However, after coming to within 1% of a weekly Gann Line, that now provides resistance around 4,275, the index retreated back to a low of 4,192.18. The August 16 high was at 4,325.28.
Tuesday's low was within the 4,203-4,186 support zone, which includes the August 26 Fed Chair Powell Jackson Hole speech high, the 23.6% Fibonacci retracement of the March 2020-January 2022 advance, the 100-week moving average and the February 2 and May 1 highs. The SPX was able to recover slightly above this area at the close.
Additional support is at 4,155 (weekly cloud). The rising 50-day moving average ended Tuesday at about 4,106, and the May 24 low was at 4,103.98.
Thus, with the 4,200 area still sticky, ahead of the debt ceiling deal vote expected later on Wednesday, traders will ultimately be looking for momentum outside of the 4,103-4,325 area to potentially signal the next bigger move for the index.
(Terence Gabriel)
*****
FOR TUESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
SPX05312023 https://tmsnrt.rs/45D8AL6
earlytrade05312023 https://tmsnrt.rs/3MHnXcW
Job openings and the unemployment rate https://tmsnrt.rs/42vh58t
JOLTS https://tmsnrt.rs/3qepU93
Chicago PMI https://tmsnrt.rs/3IOdds4
Nonfarm payrolls https://tmsnrt.rs/43BJfPM
Closer05312023 https://tmsnrt.rs/3OKl8uh
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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