How June’s Wage Growth Could “Kill” Stocks Tomorrow

Stocks rallied this morning as dip-buyers emerged ahead of tomorrow’s jobs report. The Dow, S&P, and Nasdaq Composite all gained moderately through noon.

Commodity stocks led the way, aided by a strong rebound in oil prices. Chevron (NYSE: CVX) jumped 2.5% while Exxon (NYSE: XOM) gained over 3%. Copper stock Freeport-McMoRan (NYSE: FCX) surged 6.6%.

Chipmaker shares were up as well following a strong earnings report from South Korean company Samsung. Up until the earnings release, most chipmakers were down significantly over the last week in response to a Micron (NASDAQ: MU) profit warning.

“There’s not necessarily much conviction in this move, but it is nice to see that, in the absence of new negative news, that markets are bouncing off of short-term oversold levels,” said Edward Jones strategist Angelo Kourkafas.

Much of today’s rally is driven by the fact that the June FOMC meeting minutes, released yesterday, didn’t contain any bearish surprises.

“The near-term inflation outlook had deteriorated since the time of the May meeting,” the minutes said.

“Participants were concerned that the May CPI release indicated that inflation pressures had yet to show signs of abating, and a number of them saw it as solidifying the view that inflation would be more persistent than they had previously anticipated.”

The Fed also decided in June that an “increase of 50 or 75 basis points would likely be appropriate at the next meeting.”

That’s in line with what the market was expecting.

But analysts remain split on whether the Fed will actually hike like it says it will.

“Markets right now are betting that the Fed is going to break and follow the economy, not necessarily inflation,” said Kingsview Asset Management portfolio manager Paul Nolte.

Two weeks ago, that was certainly the case. More recently, however, investors have started to wonder whether damage from the recession will outpace any benefit added to stocks during the next round of quantitative easing (QE).

“Stocks could see a second phase of bear market driven by earnings weakness. A trough is likely to come only when unemployment rates are close to peaking, which could be a year or so from now,” warned Trevor Greetham, head strategist at Royal London Asset Management.

“Broad diversification, active tactical asset allocation, and disciplined downside risk management will be key to navigate the bumpy road ahead.”

Ahead of earnings season is tomorrow’s jobs report release, which could also be a sentiment-shifting moment depending on how investors interpret the data.

“With anecdotes of Tech sector layoffs and hiring freezes, sub-50 readings in the Employment

Components of the most recent ISM Manufacturing and Services surveys, and rising unemployment claims (albeit from extremely low levels), Friday’s Jobs report will hold particular significance,” said Credit Suisse chief US equity strategist Jonathan Golub in a note to clients.

If private payrolls miss badly, it might be seen as a sign that the Fed will drop rates. Or, traders will take it as a signal to sell in anticipation of a crushing recession instead.

A big jobs beat would be similarly confounding.

But the most important stat coming out tomorrow will be June’s wage growth. Fed Chairman Jerome Powell is focused on inflation, not jobs. If wage growth is hotter than expected, the jobs number won’t matter, as traders will view a wage growth surge as a very bearish impulse.


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