The Week’s Big Event Is the Jobs Report for May

As the market enters the often weak month of June, the big event in the world of finance is the U.S. jobs report for May. May was anything but a stellar month, finishing with mixed performance. Both the Dow and Standard and Poor ticked up, with the Dow going up by 1.9 percent. The tech-heavy Nasdaq fell 1.5 percent.

Historically, June is a weak month for stocks. Over the last 50 years, the Dow has gained, on average, 0.12 percent and has been positive a little over half the time. June has gotten weaker over the last 20 years where there was a gain on the Dow considerably less than half of the time.

June and September share the dubious honor of being the worst two months of the year. Over these 20 years, the Dow declined 0.7 percent on average.

Although the report provides accurate data on activity within the manufacturing and services sectors, the most important statistic is going to be the job report. Economists are expecting the jobs report to show that, during May, nearly 675,000 jobs were created, this after April’s disappointing loss of 266,000.

George Goncalves, head of strategy at MUFG (Mitsubishi UFJ Financial Group) is concerned that if the expectations on job creation go unmet for two months in a row, the market may begin to exhibit nervousness. He is hoping that the forecast is beaten, which, in turn, tends to create a positive environment. Should this be the case, the Fed has every reason to say, “The economy is right on track.”

Big Event in June

Market professionals are expecting the June 15-16 meeting of the Fed to be the most important meeting of the month. The Fed is emphasizing it can maintain the current easy policy as it watches for signs of a greatly improved economy. The Fed is contending that the current higher inflation readings are temporary as the numbers are being compared with last year’s period, which was very weak.

In the event inflation is running hot, the primary weapon the Fed has to fight the issue is to raise interest rates, a possibility that makes stock markets nervous.

Higher interest rates mean higher costs and less liquidity for companies.

As well as the economic health of the country, Friday’s jobs report is seen to be the “big read.” With inflation readings higher than expected, this report looms large. The consumer expenditures price index of last Friday was not good, showing inflation running at 3.1 percent year over year, the strongest reading since the early 1990s.

Inflation on the Rise

The Fed has already stated that it would tolerate average inflation of about 2 percent until such time as it sees the rate of inflation at a higher level, and staying there. Currently, inflation is mostly running at less than 2 percent.

Tech stocks, as measured by the Standard & Poor IT sector gained 1.6 percent in May, 5.9 percent on the year. The sector is lagging; the S & P 500 shows a strong 12 percent gain. Within the last week, the S & P gained 1.2 percent, bringing the index to within one percent of its all-time high. The Dow rose, closing the week at 34,530, the Nasdaq closed the week 2 percent up at 13, 750.

Liquidity is Becoming a Problem

There are signs of a large surge in liquidity. Nearly one-half trillion dollars was placed with the Fed last Thursday alone.

From all appearances, the trillions of dollars in stimulus money have not yet been spent, but the money has entered the banking system. Money-market funds are holding more than $4.6 trillion and are putting pressure on the monetary system. Should the situation not improve, there is reason to think the Fed may raise rates on excess reserves.