Wall Street Rally Takes a Breather Before US Jobs: Markets Wrap

(Bloomberg) — Stocks and bonds lost steam on the eve of a key US jobs reading that will help shape the outlook for the Federal Reserve’s next steps.

Equities stalled near all-time highs as traders refrained from big bets ahead of the data. A 22V Research survey shows there’s no consensus about the market reaction — with 36% of investors betting on a “risk-off” move, 33% saying “risk-on” and 31% “negligible/mixed.” Treasuries wavered. The euro rose as the European Central Bank raised inflation forecasts after cutting rates.

US PREVIEW: Nonfarm Payrolls and Unemployment to Rise Together

In the run-up to the payrolls reading, Wall Street waded through a slew of data. Jobless claims topped estimates, labor costs increased by less than previously reported and the trade deficit widened. Friday’s report is expected to show the US added 180,000 jobs in May while the unemployment rate held steady.

“A slowing in the job market, and even an increase in unemployment, should be welcome to the extent that it alleviates some upwards pressure on inflation,” said Chris Zaccarelli at Independent Advisor Alliance. “But we are aware that too much weakness in the labor market and in the economy could eventually prove to be an even greater threat to markets than inflation.”

The S&P 500 was little changed after notching its 25th record in 2024. The US is opening antitrust investigations into Microsoft Corp. and Nvidia Corp. over their dominance of artificial intelligence, according to people familiar with the matter. GameStop Corp. surged as Keith Gill, known as “Roaring Kitty,” scheduled a YouTube live stream for June 7 at 12 p.m. New York.

US 10-year yields fluctuated near 4.29%. Swap markets continued to pencil in the start of the Fed rating cut in November, with a strong likelihood of another reduction in December.

“We look for payrolls to continue to lose momentum,” said Oscar Munoz and Gennadiy Goldberg at TD Securities. “Markets will likely react more to a weaker print than strong data, but data likely needs to be much weaker given that investor expectations have declined.”

A pre-payrolls survey conducted by BMO Capital Markets showed that 33% of respondents would “sell strength” and 54% indicated a willingness to “buy a dip.”

“The takeaway from this month’s pre-payrolls survey was that investors are comfortable playing the range, at least for the time being,” wrote strategists led by Ian Lyngen.

The tally also showed that 46% of respondents expect the next 15 basis-point move in 10-year yields to be higher — while 41% expect a fall.

Investors are balancing between growing evidence of an economic slowdown and the implications for rate cuts, according to Ed Clissold at Ned Davis Research. 

“Moderating, but positive, growth would be the best-case scenario for stocks,” he added.

On the one hand, a cooling economy is signaling potential interest rate cuts, which can be bullish for stocks. But the reason of rate cuts matters too.

“If it’s because of a slowdown in inflation, it can be bullish for stocks. But if the Federal Reserve cuts because of a slowdown in growth, it’s not good news for corporate earnings,” said Matt Maley, chief market strategist at Miller Tabak + Co.

As equities remain near record levels, stock fragility — or the magnitude of a company’s daily share-price move relative to realized volatility of the past 21 days —  is approaching a 30-year extreme for the 50 largest stocks of the S&P 500 according to Bank of America Corp. strategists.

“So far, these fragility shocks have been idiosyncratic,” BofA analysts wrote. “However, there’s a risk of a correlated shock among these companies that control so much of the US as well as global equity indexes.”

The stock market will continue its uptrend in the second half of 2024, albeit at a slower pace following a double-digit run since January, according to Morgan Stanley’s Lisa Shalett.

“The path of least resistance between now and the end of the year is for the market to grind higher,” the chief investment officer of the bank’s wealth management unit told Bloomberg Television. That said, investors should have “measured expectations” around the magnitude of equity returns from now through December, with the S&P 500 already up 12% year-to-date, Shalett added.

The stock market’s strength in the first half of 2024 is on track to carry on into the remaining months of the year — and expand into quieter corners of the market, according to Citigroup Inc.’s wealth management business.

That’s why the group predicts the S&P 500 Equal Weight Index — which gives an even share to each constituent — may soon outperform the market-value weighted benchmark S&P 500. 

While US technology behemoths have almost single-handedly powered the market of late, continued economic strength and profit growth in companies other than Big Tech are expected to broaden equity returns through the rest of this year.

Traders have escalated rate-cut bets in the past week, emboldened by a slew of softer-than-forecast US economic data, the Bank of Canada’s decision to ease monetary policy, and bets the ECB would be the next to cut — a move confirmed on Thursday.

“Bullish trading action in recent days has been motivated by the expectation that the Fed will follow suit as bond investors incrementally expand expectations for an accommodative central bank,” said Jose Torres at Interactive Brokers.

In a historic move that saw the ECB slashing borrowing costs ahead of the Fed, officials led by President Christine Lagarde said that while the inflation outlook has improved “markedly,” they’ll “keep policy rates sufficiently restrictive for as long as necessary.”

“The meeting signals the ECB is not going to cut in July, and September is not locked in advance,” said Krishna Guha at Evercore. “But we stand by our view this is a ‘cautious cut’ not a ‘hawkish cut’.”

Corporate Highlights:

• Lyft Inc. is expecting gross bookings to grow about 15% at a compound annual rate over the next three years.
• Hertz Global Holdings Inc., seeking to bolster its balance sheet after an electric-vehicles blunder, is considering the sale of at least $700 million in secured debt as well as a convertible notes offering, according to people with knowledge of the matter.
• Instacart announced a new $500 million share repurchase program, the third round of buybacks the grocery delivery company has authorized since September as it seeks to boost confidence in its growth potential.
• Nio Inc. reported a bigger-than-expected loss in the first quarter as increased competition dealt the electric-vehicle maker another setback in its push for profitability.
• SpaceX’s Starship rocket blasted off to space and plunged through Earth’s atmosphere for an ocean landing, notching a key objective on its fourth major test flight.
• Boeing Co.’s space taxi docked with the International Space Station, bringing the spacecraft’s first two passengers to the orbiting laboratory as part of a critical flight test for NASA.

Key events this week:

• China trade, forex reserves, Friday
• Eurozone GDP, Friday
• US unemployment rate, nonfarm payrolls, Friday

Some of the main moves in markets:

–With assistance from Winnie Hsu, John Viljoen, Sujata Rao, Ruth Carson, Masaki Kondo, Natalia Kniazhevich and Alexandra Semenova.

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