May is about to kick off. Unlike last May, there is a lot to look forward to this year as vaccinations continue to move forward, various recreational venues are opening, people are getting back on track, and the jobs report is doing well, so there is a lot to look forward to this May.
Perhaps the employment data is not as exciting as the various recreational activities, after all, people have not participated in recreational activities for a year. However, the U.S. nonfarm payrolls data for April, due out next Friday (May 7), could make some waves in the stock and bond markets in May.
Will the jobs data continue the strong performance of March? If it is strong, will it raise consumer concerns about an overheated economy? And how will the Fed respond? These questions may have an impact on the next few days or weeks of trading.
In addition to the jobs data and speeches by Fed officials, there is much to watch in May, including first-quarter earnings reports from U.S. companies, the state of the epidemic in various countries, the progress of the Biden-based construction program, and any news about corporate mergers and acquisitions. However, the jobs report and Fed developments remain the two biggest points to watch.
Point 1: April non-farm payrolls will be very good?
Last May, Americans were basically fighting the epidemic, and the employment data released at that time could be very ugly. The employment report showed that in April last year, the U.S. unemployed population exceeded 20 million people, the unemployment rate soared to 14.7%.
By May of this year, the market was expecting the U.S. to add 916,000 jobs and the unemployment rate to drop to 6%. Of course, the unemployment rate is still some way from pre-epidemic levels, and there are still millions of people in the U.S. without jobs. The previous data also gives us some reference. The first two weeks of U.S. initial jobless claims were both at new lows since the epidemic, both less than 600,000, but still very high.
But all in all, the latest jobs report should hint at improving conditions, so you can look forward to that.
Now the question is, if the employment data is performing beautifully, will this trigger concerns about inflation?Briefing Research says that, in fact, there were already concerns about inflation in the market earlier this year. Only the Federal Reserve’s statement on inflation temporarily eased market concerns.
But recently, major companies such as Coca-Cola and Kimberly-Clark have announced price increases, and these companies said that if higher costs affect their profits, they will have to raise prices. If that’s the case, it will inevitably reignite fears.
Previously, due to rising inflation concerns, the yield on the 10-year U.S. Treasury note rose from about 0.9% to 1.77% in the first quarter of this year, hitting a 13-month high.
Although bond market volatility declined in April, if the data turn out to be good, do not rule out a renewed surge in volatility in May. Keep in mind that rising U.S. bond yields are often accompanied by inflation concerns, which can be very damaging to growth stocks.
Point 2: Will the Fed reveal a signal to turn hawkish?
Is it too early to discuss a rate hike? The market doesn’t think so.
At the end of April, the Fed’s FedWatch forecasting tool from Chicagoland (CME) showed a 10% probability of a Fed rate hike by the end of 2021. Recent rate hike bets have suddenly fallen sharply, and Barron’s research shows that the Fed’s likelihood of raising rates this year is almost zero. Many analysts also said that the Fed will not raise rates until late 2022 at the earliest. And the Fed itself is expected to not raise rates until 2023.
Keep an eye on FedWatch’s forecast in May, and things may change. After all, near-zero interest rates have been maintained for a year now, and investors are waiting for a signal to raise rates. In addition to the rate hike, investors will have to pay attention to whether the Fed will withdraw the $120 billion monthly bond purchase program.
However, the market generally expects the Fed to turn hawk in the near future is extremely unlikely, because the Fed is currently focused on reducing the unemployment rate and lifting inflation above 2%.
Point 3: Do companies’ earnings reports continue to shine?
The U.S. earnings season came to a close in mid-April, with most technology, telecom and health care companies reporting strong financial results. Of course, some companies did not perform as well as Wall Street expected, such as Emirates Airlines; Nifty’s earnings were a big disappointment; and furniture supply companies (Bed, Bath & Beyond) did not impress with their earnings.
In May, there will be big companies including Walmart, Pfizer, Lyft, T-Mobile, Uber, Moderna and Deere to report, so investors can stay tuned.
The tug-of-war between growth and value stocks is likely to continue as earnings reports come in. So far this year, the S&P 500 has outperformed the Nasdaq 100. value stocks outperformed in March, while growth stocks and technology stocks were better in April. As for May, we will see which type of stock performs better.
Point 4: Be wary of commodity price volatility
In addition to the above-mentioned developments, investors will need to keep an eye on commodity prices in May. April saw strong performances in crude oil, lumber and copper, a sign of economic growth but also one that may have squeezed the profit margins of many companies.
Keep in mind that commodity prices affect many companies. If the price of crude oil rises to $70 per barrel, it will greatly increase transportation costs and create difficulties for transportation companies. In addition, supply chains like Walmart and Amazon rely heavily on cheap energy supplies, and if prices spike, they won’t have a good time. And manufacturing and real estate are also affected by the price of copper and lumber prices.
Watch 5: Progress on the Biden-based construction bill
Finally, we can also keep an eye on the progress of Biden’s $2 trillion infrastructure bill. According to foreign media reports, on April 22, the Biden administration proposed that the capital gains tax will be raised, and the stock market once fell sharply on the news that day. in May, Congress will continue to deliberate on the plan, and we can pay attention to the impact of this tax increase plan on market sentiment.
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