Schrodinger's recession
Main U.S. indexes advance: Nasdaq out front, up >1%
Energy leads S&P 500 sector gainers; utilities weakest group
Dollar, bitcoin lower; gold up, crude rallies ~4%
U.S. 10-Year Treasury yield dips to ~3.61%
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SCHRODINGER'S RECESSION (1345 EDT/1745 GMT)
Are we in a recession or not? Or, like the infamous cat, are we both - at least until the NBER opens the box?
Oxford Economics (OE), in its Recession Monitor on Thursday titled "Hovering on the edge," observes that while the U.S. economy appears to be "holding up reasonably well," it also "faces several hurdles during the second half of the year, including the lagged effect of tighter monetary policy and stricter lending standards."
Looking past the fairly robust economic data of recent weeks, Ryan Sweet, chief U.S. economist at OE, identifies some clouds on the horizon.
First, he says "growth has slowed significantly for commercial and industrial and commercial real estate loans."
Second, Sweet flags the "statistical discrepancy," or the gap between GDP and GDI, which is at its widest in the data series' history. When this gap grows, he observes, GDP is often revised closer to GDI.
"Therefore, the gain in GDP in the first quarter is likely misleading," Sweet writes.
Third, the note points to OE's own Business Cycle Indicator, which "suggests that the economy is not currently in a recession but has lost a lot of momentum and is vulnerable to anything else that could go wrong."
And finally, the OE note reminds us of the Fed's promise to remain data dependent.
"We believe growth of more than 200k in nonfarm payrolls, a steady unemployment rate, and core CPI of around 0.4% m/m would cause the Fed to resume raising interest rates after skipping a rate hike at the upcoming June meeting," Sweet says.
Here's OE's Business Cycle Indicator, courtesy of Oxford Economics and Haver Analytics:
(Stephen Culp)
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BETTER BUYING OPPORTUNITIES AHEAD, IN MEAN TIME, GET PAID TO WAIT -WFII (1212 EDT/1612 GMT)
The S&P 500 index's .SPX most recent foray into the 4,180-4,200 area is the sixth time since early February that the market has tested this resistance range.
This action has not gone lost on Scott Wren, senior global market strategist at the Wells Fargo Investment Institute (WFII), who's advice continues to be "don't chase this rally," given that he sees an unattractive risk/reward tradeoff from current levels (SPX last 4,215).
Wren believes the SPX will spend most of its time in 2023 in a 3,700-4,200 range, and recommends investors remain patient. That said, based on WFII's 2024 year-end target mid-point of 4,700 for the SPX, he does say that there might be 5% upside or so over the next six-to-nine months.
However, Wren notes that short-term Treasury bills in the three-to-12 month maturity range offer yields in excess of 5%, and therefore, taking advantage of this could provide a low risk return vs a riskier potential return in the S&P 500 over the same time frame.
Wren's bottom line for stocks is that better buying opportunities will be available over the coming six to 12 months.
"We expect downside in stocks for some stretch of that time frame as the Federal Reserve keeps the fed funds target rate higher for longer, credit conditions tighten further, earnings slow more than the consensus currently expects, and inflation only slowly falls as we approach year-end," writes Wren.
Thus, for now, Wren is seeking to preserve capital by using short-term fixed income along with an overall defensive stance.
(Terence Gabriel)
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DATA DELUGE: ADP, JOBLESS CLAIMS, PMI ET AL (1114 EDT/1514 GMT)
Market participants were drenched by a data downpour on Thursday, much of which centered on a tight, but shifting, labor market.
The private sector added 278,000 jobs in May, according to payroll processor ADP's National Employment index USADP=ECI.
A 63.5% surprise to the upside, the number is also 113,000 north of what analysts expect the Labor Department's employment report to show on Friday.
While the NEI has a spotty track record as a predictor of official private payrolls, the hot print could very well bode for a hotter than expected jobs report on Friday.
Nonfarm payrolls, after all, have come in above economist projections in 11 of the most recent 12 months.
"We expect payrolls to remain positive for now," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "But the pace should moderate as the lagged and cumulative effects of monetary policy filter through more broadly through the economy."
The number of U.S. workers filling out first-time applications for unemployment checks USJOB=ECI edged higher to 232,000 last week, 3,000 fewer than analysts expected.
While initial claims have been above 200,000 every week since early February, they have yet to reflect the recent surge in high-profile layoff announcements, much of which has come from tech- and tech-adjacent sectors.
Ongoing labor market tightness is not something Powell & Co like to see.
"While we expect the Fed to leave rates steady at its upcoming meeting, a more sustained loosening of labor market conditions is needed to keep rate hikes permanently off the table," says Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
Ongoing claims USJOBN=ECI, reported on a one-week lag, also inched up, to 1.795 million, a hair below estimates.
Speaking of layoffs, U.S. firms don't appear to be in danger of running out of pink slips.
Announced job cuts USCHAL=ECI increased by nearly 20% last month to 80,089 according to executive outplacement firm Challenger, Gray & Christmas (CGC).
That's 287% year-over-year increase. The running tally so far in 2023 is 417,500, which is more than triple the number of layoffs in January-to-May 2022.
"With the exception of 2020, it is the highest total in the first five months of the year since 2009," notes Andrew Challenger, senior vice president at CGC.
So far this year, the hardest-hit sectors are tech, retail, and - in light of the recent regional bank liquidity crisis - financials.
In more ancient job market history, the Labor Department revised its first-quarter labor costs down to a cooler 4.2% from 6.3%, and revised its previous productivity decrease to a shallower 2.1%.
Pivoting away from jobs, activity in U.S. factories continued to contract in May.
The Institute for Supply Management's (ISM) purchasing managers' index (PMI) USPMI=ECI shed 0.2 points to 46.9 last month, marking its seventh month south of the 50 border, which indicates a monthly decrease of activity.
The good news is that employment picked up, and the prices paid component - an inflation predictor - dove steeply into contraction, to 44.2 from March's 53.2.
"New order rates contracted further, as panelists remain concerned about when manufacturing growth will resume," says Timothy Fiore, chair of ISM' manufacturing business survey committee. "Price instability remains and future demand is uncertain as companies continue to work down overdue deliveries and backlogs."
Not to be outdone, S&P Global issued its final take on May PMI USMPMF=ECI, landing at 48.4, just a hair below its advance "flash" reading of 48.5 issued a few weeks ago.
The dueling PMIs differ in the weight they allot to their various components (new orders, prices paid, etc).
Finally, expenditures on U.S. construction USTCNS=ECI unexpectedly surged by 1.2% in April, blowing past the meager 0.2% increase analysts expected.
The Commerce Department's report showed spending on residential projects enjoyed its first meaningful monthly increase in a year, boosted by the multi-unit segment.
(Stephen Culp)
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MORE CAUTION THAN CHEER (1022 EDT/1422 GMT)
Wall Street's main indexes are around flat to modestly lower early on Thursday.
Optimism, sparked by passage of a bill by lawmakers to suspend the nation's debt ceiling, is being offset by dismal earnings from Salesforce CRM.N.
The bill to suspend the $31.4 trillion debt ceiling on Wednesday passed with majority support from both Democrats and Republicans and will now head to the Senate, which must enact the measure before a Monday deadline, when the government is expected to run out of money to pay its bills.
A majority of S&P 500 .SPX sectors are lower with utilities .SPLRCU taking the biggest hit. Communication services .SPLRCL is posting the strongest rise.
Banks .KRX, .SPXBK and FANGs .NYFANG are among those groups outperforming.
Here is a snapshot of where markets stood around 45 minutes into the trading day:
(Terence Gabriel)
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CRUSHED CORRELATIONS A WARNING FOR STOCKS? (0910 EDT/1310 GMT)
On Tuesday, the CBOE implied correlation index .COR3M hit its lowest level since October 2018. Thus, traders are on alert in the event this measure starts to percolate:
The CBOE describes the COR3M as a "gauge of herd behavior." It measures the average expected correlation between the top 50 stocks in the S&P 500 index .SPX. The COR3M tends to decline during rally phases and rise amid periods of market stress.
Indeed, on Tuesday the COR3M fell to a reading of 24.06, which was its lowest print since 23.29 on October 4, 2018.
Looking back over the last 5-1/2 years or so, low COR3M readings preceded significant S&P 500 sell offs that began in early 2018, late 2018, early 2020, and early 2022.
With increasing concern over narrow market breadth and gains concentrated in a handful of mega-caps, traders are keeping a close eye on correlations.
Underscoring the concentration of gains, the S&P 500 is up about 9% YTD. Meanwhile, the equal-weighted SPX .SPXEW is actually down 1.4% so far in 2023.
Higher correlation of individual shares (low dispersion) usually means stocks are moving more closely together, dimming benefits of diversification as well as stock picking skills.
(Terence Gabriel)
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FOR THURSDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
COR3M06012023 https://tmsnrt.rs/3qptnlq
earlytrade06012023 https://tmsnrt.rs/3C8q7gS
Jobless claims https://tmsnrt.rs/3oFjkrE
Challenger Gray https://tmsnrt.rs/42cTnh3
ISM PMI https://tmsnrt.rs/3N4TB5w
Construction spending https://tmsnrt.rs/3OPZxjT
Oxford Economics Business Cycle Indicator https://tmsnrt.rs/43Dju1O
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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