The Dow Jones Industrial Average sliced back below the 18,000 level in intraday trading on Friday, bringing it back below the benchmark level it first crossed back in December, before the bulls were able to manage a feeble rebound back over the psychologically important level heading into the weekend.
In the end, the Dow Jones lost 0.6%, the S&P 500 lost 0.6%, the Nasdaq Composite lost 0.6% and the Russell 2000 lost 0.5%.
The bulls have been unable to clear the level definitively on a cavalcade of niggling worries: Rate hikes from the Federal Reserve, a possible Greece exit from the eurozone, ongoing disappointment with the economic data. The result has been a downward drift in measures of market breadth, reflective of the fact that fewer and fewer stocks are participating to the upside.
The flow of macroeconomic data is sure making it hard for the optimists: On Friday, the government revised its estimate of first-quarter GDP growth to a decline of 0.7% from the original 0.2% growth estimate. A wider trade deficit was fingered for the decline, a consequence of the U.S. dollar’s strengthening over the past year.
Separately, the Chicago PMI manufacturing activity index slid into negative territory after a bounce in April — suggesting ongoing issues in the factory sector.
Oil prices rallied hard on another drilling rig count reduction, a reduction in the Environmental Protection Agency’s biofuel quotas, and gains by ISIS forces in Libya. West Texas Intermediate gained 4.4% to close above $60 a barrel.
The specter of interest rate hikes from the Federal Reserve — the spooky catalyst that’s been bothering investors all year — will loom large again as the calendar flips to June next week with the employment situation report on Friday.
Job growth bounced back in the May report (for April data) after a soft March report blamed largely on severe weather. With the unemployment rate already at 5.4%, another 200,000-plus payroll gain will raise the pressure on the Fed to raise rates possibly as soon as June but likely in September for the first time since 2006. Deutsche Bank economists are looking for a 275,000 payroll print and a one-tenth decline in the jobless rate to 5.3%.
This will be the last jobs report before the Fed convenes for its June 17-18 policy meeting. Not only could the Fed throw the market a curveball and unexpected raise rates but policymakers are due to update their individual projections of where interest rates and the economy are headed. Known as the “dot plot” this Summary of Economic Projections will be closely watched for the likely timing of rate liftoff later this year.
The Fed’s last SEP data, which caused a market rally in March when it reflected a less aggressive path of rate hikes, remains much more hawkish than where the futures market is. Either the Fed comes down to where traders are (a dovish response) or it sticks to its guns (a hawkish response) and risks unsettling markets.
Complicating all this has been the recent backup in long-term Treasury yields — despite no movement from the Fed yet — as the fixed-income market prices in a rebound in inflation and economic growth later this year. A more dovish Fed would only fuel this dynamic, risking a loss of control on the long end of the yield curve for Fed chairman Janet Yellen.
Another economic release that will be closely watched for clues on Fed action will be the personal income and consumption data on Monday — which could confirm both a turnaround in wage inflation and rising consumer prices, both of which the Fed has said it wants to see before taking action on interest rates.
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