Solid Quarter Ends with Jobs Data, Nike Results

**Keith Lansford** (0:05)
Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.
I'm Keith Lansford, and here is Schwab's early look at the markets for Tuesday, June 30th. The last day of the quarter dawns, with markets up substantially from three months ago, but wobbling recently. Concerns about possible overbought conditions and heavy leverage continue to weigh on the technology sector, though improvement in market breadth suggests some rotation has begun into other areas. Whether that continues could depend on the paths of treasury yields and oil. It's a shortened week due to Friday's Independence Day holiday, meaning volatility could be a factor as volume thins before the long weekend. Anyone trading on Thursday might want to consider taking extra care, especially with markets liable to be choppy anyway, following that morning's June non-farm payrolls data. Even before that, today could bring volatile trading, since it's the last day for window dressing, when major funds tend to shift positions to shed losers and add winners before sending out quarterly reports to investors. With many magnificent seven stocks lagging the market over the last month, despite yesterday's slight comeback, this could conceivably mean additional index pressure. Yesterday's mega cap revival might have reflected ideas that the sell-off had gotten too advanced. Some valuations, including Microsoft, are quite low relative to historic data.
Federal Reserve thinking could be influenced by manufacturing and other data, starting with the May Job Openings and Labor Turnover Survey, or JOLTS due soon after today's opening bell. The April reading was 7.6 million, well above expectations, and May's is expected to be slightly below that, at 7.3 million, but still above recent long-term lows. These are the highest levels in more than a year, suggesting companies are starting to emerge from the no-hire-no-fire climate that's prevailed. That's not completely clear, of course, but US jobs growth is also up three months in a row. Job openings rose to a nearly two-year high in April, and the ratio of job openings to the number of unemployed is back above 1.0, noted Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. Any additional strength in the labor market can help keep the Fed's hawkish bias going. Analysts expect the June nonfarm payrolls report Thursday to show lower gains than the 172,000 seen in May. Early consensus is 110,000, which would still be adequate to keep pace with population growth. Jobs data isn't likely to budge the Fed from another rate pause when it meets at the end of next month, but could provide guidance for its long-term policy. Relatively benign inflation data last week suggested the Fed might be able to wait before deciding its next move. However, some policy makers appear ready to raise rates based on recent speeches. Inflation has tracked above the Fed's 2% target now for about 5 years. As of late Monday, investors priced in 63% chances of the Fed raising rates as soon as September. According to the CME Group's FedWatch tool, chances of a July hike were far less at around 31%.
Fed Chairman Kevin Warsh speaks at a forum tomorrow, but it would be surprising if he gives any new rate guidance after the Fed's recent hawkish meeting where he emphasized fighting inflation. A rate hike isn't guaranteed this year, despite what the futures market might indicate. We're not expecting a Fed hike by year end just yet, Martin said. While the last Fed meeting was hawkish, we think the worst in the recent pickup in inflation may be behind us.
Last week's rotation out of tech and into sectors like industrial and health care could get a second wind in coming days, but it depends partly on the path of treasury yields, which means to some extent it depends on crude oil and its recent correlation with yields. If oil rises, the 10-year treasury note yield could too, possibly hurting chances for a non-tech rally. In market related news Monday, the Supreme Court rejected President Trump's request to immediately fire Fed Governor Lisa Cook over unproven mortgage fraud allegations, Bloomberg reported. The justices ruled 5 to 4 that Trump hadn't given her enough notice or a chance to be heard before trying to fire her. The ruling wasn't definitive, leaving open the question of whether a president can ever fire a Fed Governor. The decision came as expected, settling one source of Fed independence insecurity for the moment.
Treasury yields barely moved on the news Monday and had a little data to react to. The 10-year yield remains around near-term lows below 4.4 percent. The jobs reports this week may give treasuries a catalyst, while next week includes several treasury auctions. The dollar retreated Monday from recent one-year highs but remains elevated and could be lending support to treasuries, which move the opposite of yields. A strong dollar reflects weakness in the Japanese yen, solid US economic data and falling oil prices.