JPM: “There Is A Cloud Hanging Over The Equity Rally, But Stocks Don’t Seem To Mind (For Now)”

Adam Crisafulli recaps what matters this morning as we head into today’s payrolls report, noting that “the inability of TSY yields to rise (along w/the dramatic multi-month curve flattening process) remains a cloud hanging over the equity rally but stocks obviously don’t seem to mind (for now).” Whether this changes will depend largely on one thing: today’s wage number – if it comes in above the expected, we may finally get some curve steepening, if not the divergence will continue…

Trading Update

Market update – the equity rally continues. What’s happening this morning? As far as incremental news is concerned, it was a very quiet evening. Stocks saw solid gains in Asia and Eurozone indices are bid higher too (US futures are up) as global markets react to the robust American close from Thurs. There still isn’t a specific fundamental “reason” for the US Thurs rally other than stocks are benefiting from ongoing upside momentum. Eco data in the US Thurs morning was solid although it would be nice to see this ostensibly brighter growth outlook ratified by Treasuries (instead, TSY yields ended Thurs flat and they are unchanged so far Fri morning). The inability of TSY yields to rise (along w/the dramatic multi-month curve flattening process) remains a cloud hanging over the equity rally but stocks obviously don’t seem to mind (for now).

The crude slump continues – some are trying to blame Trump’s Paris withdrawal (less environmental controls means more drilling according to this view) although that feels more like an excuse than an actual driver. Crude has been for sale ever since the OPEC decision was confirmed last week and ostensibly positive headlines on Thurs (including favorable API/DOE inventory and a Reuters article talking about the potential for further OPEC/Russia output cuts) couldn’t help halt the slide – it isn’t that markets doubt the resolve of OPEC/Russia but instead there is ongoing concern that those producers no longer control oil like they once did.

US jobs for May – the monthly labor reports have been stalwart, holding in strong while other economic figures lately have turned more mixed (thus a weak 6/2 release will have more market influence than a strong one as it would confirm the softening trend being witnessed elsewhere). Investors are looking for another relatively solid jobs release – the St print estimate is +180K (vs. +211K in Apr) although the robust ADP reading (+253K) has caused “whispers” to move to the ~200K range. Other Street estimates for May: 4.4% UR (unchanged vs. Apr) and wages +0.2% M/M and +2.6% Y/Y (vs. +0.3% M/M and +2.5% Y/Y in Apr). “Upside” on the adds front (anything up to ~250K) is unlikely to impress anyone or shift the growth narrative dramatically (investors think of monthly jobs the same way they look at auto sales – both are expected to weaken going forward and investors won’t be comfortable until the depth of the trough is revealed). Investors will be watching wages closely given the recent CPI shortfalls while another  tick lower in the UR would place more pressure on the Fed.