Worries About Monetary Policy Outlook May Weigh On Wall Street

The major U.S. index futures are pointing to a lower open on Thursday, with stocks likely to come under pressure after closing nearly unchanged for two straight days.

While a report from payroll processor ADP showed private sector employment in the U.S. spiked by much more than expected in the month of May, the strong job growth may raise concerns about the outlook for monetary policy.

ADP said private sector employment soared by 978,000 jobs in May after surging by a downwardly revised 654,000 jobs in April.

Economists had expected private sector employment to increase by 650,000 jobs compared to the addition of 742,000 jobs originally reported for the previous month.

A separate report from the Labor Department showed a modest decrease in first-time claims for U.S. unemployment benefits in the week ended May 29th.

The report said initial jobless claims dipped to 385,000, a decrease of 20,000 from the previous week’s revised level of 405,000.

Economists had expected jobless claims to edge down to 395,000 from the 406,000 originally reported for the previous week.

With the slightly bigger than expected decrease, jobless claims once again fell to their lowest level since hitting 256,000 in the week ended March 14, 2020.

The jobs data comes a day ahead of the release of the Labor Department’s more closely watched report on the employment situation in the month of May.

Economists currently expect the report to show employment jumped by 664,000 jobs in May after climbing by 266,000 jobs in April. The unemployment rate is also expected to dip to 5.9 percent from 6.1 percent.

Largely mirroring the performance seen on Tuesday, stocks moved to the upside in early trading on Wednesday but showed a lack of direction for much of the rest of the day. The major averages once again finished the day near the unchanged line.

A late move to the upside helped the major averages close modestly higher. The Dow inched up 25.07 points or 0.1 percent to 34,600.38, the Nasdaq edged up 19.85 points or 0.1 percent to 13,756.33 and the S&P 500 crept up 6.08 points or 0.1 percent to 4,208.12.

The early strength on Wall Street partly reflected continued optimism about the outlook for the global economy following Tuesday’s upbeat manufacturing data.

Trading activity remained relatively light, however, as traders seemed wary of making significant moves amid lingering concerns about inflation.

The Labor Department’s looming monthly jobs report also kept some traders on the sidelines ahead of the release of the closely watched data on Friday.

Traders largely shrugged off the Federal Reserve’s Beige Book, which said the U.S. economy increased at a somewhat faster rate from early April to late May due in part to the positive effects of increased Covid-19 vaccination rates and relaxed social distancing measures.

The Beige Book, a compilation of anecdotal evidence on economic conditions in each of the twelve Fed districts, still described the pace of economic growth as moderate.

The Fed said the effects of expanded vaccination rates were most notable in consumer spending, as increased leisure travel and restaurant spending augmented ongoing strength in other spending categories.

However, several districts also noted the adverse impacts of supply chain disruptions, with manufacturers reporting that widespread shortages of materials and labor along with delivery delays made it difficult to get products to customers.

Similar challenges also affected the housing sector, where strong demand, buoyed by low mortgage interest rates, outpaced homebuilders’ capacity to build, leading some to limit sales.

The Fed acknowledged the continuing supply chain disruptions also contributed to an increase in overall price pressures since the last Beige Book in April.

Oil service stocks once again outperformed amid the lackluster performance by the broader markets, driving the Philadelphia Oil Service Index up by 7.2 percent to its best closing level in over a year.

The continued strength among oil service stocks came as the price of crude oil saw further upside, once again climbing to its highest closing level in over two years.

Oil producer stocks also saw some further upside, moving notably higher on the day along with commercial real estate stocks.

On the other hand, housing stocks showed a substantial move to the downside, dragging the Philadelphia Housing Sector Index down by 2 percent.

Commodity, Currency Markets

Crude oil futures are inching up $0.07 to $68.90 a barrel after jumping $1.11 to $68.83 a barrel on Wednesday. Meanwhile, after rising $4.90 to $1,909.90 an ounce in the previous session, gold futures are tumbling $22.60 to $1,887.30 an ounce.

On the currency front, the U.S. dollar is trading at 109.89 yen versus the 109.56 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.2169 compared to yesterday’s $1.2211.

Asia

Asian stocks ended mixed on Thursday as investors adopted a cautious approach ahead of the monthly U.S. jobs report scheduled for release on Friday, which could offer cues on the economic recovery and the interest rate outlook.

China’s Shanghai Composite Index dropped 12.93 points, or 0.4 percent, to 3,584.21 after a private survey showed that services activity growth slowed in May.

Hong Kong’s Hang Seng Index slumped 331.59 points, or 1.1 percent, to 28,966.03 as investors weighed inflation concerns.

Japanese shares rose as optimism over the nation’s vaccine rollout helped investors shrug off weak services sector data, with activity contracting for the 16th consecutive month.

The Nikkei 225 Index rose 111.97 points, or 0.4 percent, to 29,058.11, while the broader Topix closed 0.8 percent higher at 1,958.70, its highest closing level since April 19.

Reopening bets boosted train operators and beer makers. Railway companies extended gains from the previous session, with East Japan Railway climbing 3.4 percent and Central Japan Railway adding 2.3 percent. Beverage company Kirin Holdings surged 4.2 percent and Asahi Group Holdings gained 2.3 percent.

Automakers Honda Motor and Toyota Motor rose about 2 percent, while Fast Retailing, the operator of the Uniqlo casual clothing chain, gave up 4.1 percent, after reporting a decrease in domestic sales for May.

Australian markets hit a record high for the second straight day after new figures showed Australia’s economy has rebounded to pre-pandemic levels. Investors also cheered positive data on the country’s construction and services sectors.

The benchmark S&P/ASX 200 Index climbed 42.30 points, or 0.6 percent, to 7,260.10, while the broader All Ordinaries Index ended up 41.80 points, or 0.6 percent, at 7,510.70.

Energy stocks outperformed as oil prices surged to their highest level in over two years. Santos, Oil Search, Beach Energy and Origin Energy surged 4-6 percent.

The big four banks rose between 0.9 percent and 1.5 percent. Miners ended broadly higher, with Mineral Resources rallying more than 2 percent as iron ore prices jumped on hopes of easing production curbs for steel products.

Sezzle soared 22.7 percent after it signed a three-year agreement with retail giant Target to provide buy now, pay later (BNPL) services in-store and online.

Seoul stocks rose for the fifth straight session as inflation fears ebbed. The benchmark Kospi gained 23.20 points, or 0.7 percent, to settle at 3,247.43, bolstered by strong foreign and institutional buying.

Samsung Electronics jumped 2.5 percent and No. 2 chipmaker SK Hynix advanced 2.4 percent on expectations of strong second quarter earnings.

Europe

European stocks have moved lower in lackluster trading on Thursday despite Markit’s Eurozone services PMI coming in at 55.2 in May, up from 50.5 in April and the highest level in almost three years. The final composite Purchasing Managers’ Index (PMI) jumped to 57.1 last month from April’s 53.8.

Caution prevails as investors await the monthly U.S. jobs numbers on Friday for signs of an economic rebound amid rising inflation.

While the U.K.’s FTSE 100 Index has slumped by 1.1 percent, the German DAX Index and the French CAC 40 Index are both down by 0.5 percent.

Discount retailer B&M European Value Retail has come under pressure in London. The company reported better than expected annual profits but warned of many uncertainties as the COVID-19 pandemic subsides.

Telecoms company BT Group has also moved notably lower after being downgraded to Sell from Hold at Deutsche Bank.

Energy firm National Grid has also tumbled and home improvement retailer Kingfisher has slumped on going ex-dividend.

French wine and spirits company Remy Cointreau has also moved to the downside on the day, giving up early gains.

After reporting a 27.5 percent jump in net profit for fiscal year 2020/21, the company said it is confident in its ability to continue to win market share in the exceptional spirits sector in 2021/22.

Meanwhile, construction materials group Saint-Gobain has rallied after saying it expects to reach record operating income in the first half of the year.

U.S. Economic Reports

A report released by payroll processor ADP on Thursday showed private sector employment in the U.S. spiked by much more than expected in the month of May.

ADP said private sector employment soared by 978,000 jobs in May after surging by a downwardly revised 654,000 jobs in April.

Economists had expected private sector employment to increase by 650,000 jobs compared to the addition of 742,000 jobs originally reported for the previous month.

“Private payrolls showed a marked improvement from recent months and the strongest gain since the early days of the recovery,” said Nela Richardson, chief economist at ADP.

A separate report from the Labor Department showed a modest decrease in first-time claims for U.S. unemployment benefits in the week ended May 29th.

The report said initial jobless claims dipped to 385,000, a decrease of 20,000 from the previous week’s revised level of 405,000.

Economists had expected jobless claims to edge down to 395,000 from the 406,000 originally reported for the previous week.

With the slightly bigger than expected decrease, jobless claims once again fell to their lowest level since hitting 256,000 in the week ended March 14, 2020.

At 10 am ET, the Institute for Supply Management is scheduled to release its report on service sector activity in the month of May.

Economists expect the ISM’s services PMI to inch up to 63.0 in May from 62.7 in April, with a reading above 50 indicating growth in the sector.

The Energy Information Administration is due to release its report on oil inventories in the week ended May 28th at 11 am ET.

Crude oil inventories are expected decrease by 2.4 million barrels after falling by 1.7 million barrels in the previous week.

Also at 11 am ET, the Treasury Department is scheduled to announce the details of this month’s auction of three-year and ten-year notes and thirty-year bonds.

Atlanta Federal Reserve President Raphael Bostic is scheduled to give welcome and introductory remarks before the national launch of “Workforce Realigned: How New Partnerships Are Advancing Economic Mobility” at 12:30 pm ET.

At 1:50 pm ET, Philadelphia Federal Reserve President Patrick Harker is due to speak on “Building an Equitable Workforce Recovery” before the virtual “Workforce Realigned: How New Partnerships Are Advancing Economy Mobility” event.

Federal Reserve Vice Chair for Supervision Randal Quarles is scheduled to speak on financial regulation before the virtual SIFMA and Bank Policy Institute 8th Annual Prudential Regulation Conference at 3:05 pm ET.

Stocks In Focus

Shares of FireEye (FEYE) are moving sharply lower in pre-market trading after the company announced an agreement to sell the FireEye Products business, including the FireEye name, to a consortium led by Symphony Technology Group for $1.2 billion in cash.

Cloud-based enterprise software company Splunk (SPLK) may also come under pressure after reporting a wider than expected fiscal first quarter loss.

On the other hand, shares of Ciena (CIEN) are likely to see initial strength after the networking company reported fiscal second quarter results that exceeded analyst estimates on both the top and bottom lines.