Equities finished with modest losses on Tuesday, recovering from steep early losses, as weakness in the bond market was reversed heading into a U.S. Treasury auction. The 10-year yield tested 2.33% before finishing down at 2.25%.
Oil prices pushed higher; with West Texas Intermediate gaining 2.3% to close at $60.61 a barrel (jumping above $61 after hours after the API inventory report showed a 2 million-barrel draw) after the EIA raised its U.S. demand forecast and lowered its crude supply estimate.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.4%, and the Russell 2000 lost 0.2%.
Energy stocks led the way with a 0.4% gain while materials led the decliners, falling 1% as a group. AOL, Inc. (NYSE:AOL) surged 18.6% on news it would be acquired by Verizon Communications Inc. (NYSE:VZ) in a deal worth roughly $4.4 billion. The transaction is expected to close this summer and is just the latest merging of telecoms with media providers as the production and delivery of entertainment becomes increasingly comingled amid the rise of “cord cutters” and walled gardens — Netflix, Inc. (NASDAQ:NFLX) exclusives, for instance).
The April Job Opening and Labor Turnover Survey continued to add support to the idea the weak March payroll report was an anomaly and that the job market is rapidly moving towards full employment. While job openings dropped slightly last month — but remain in the midst of an impressive uptrend as shown above — the quit rate rose to 2%.
According to Philippa Dunne of the Liscio Report, this is an important measure of worker confidence that Fed officials, including Chairman Janet Yellen, pay particularly close attention to. This measure was an even higher 2.2% rate within the private sector.
The rebound in the quit rate suggests the balance of power in the labor market is finally shifting from employers to employees; a leading indicator that wages, a powerful contributor to overall inflation (and thus, long-term interest rates), are about to get a big lift.
The bond market is already pricing all this in. According to Capital Economics, the lift in long-term interest rates in late April was initially driven by a rise in inflation expectations no doubt connected to the rebound in crude oil from a low of $42.41 a barrel in March to test above $60 a barrel now — an increase of more than 40%.
Now, the rise in long-term interest rates (and thus, the price weakness of long-term Treasury bonds) is being driven by a big increase in economic growth expectations driven in large part by the assumption that empowered consumers are on the cusp of providing a big boost to retail sales and the housing market over the summer.
Still, wild cards remain. In Europe, negotiations with Greece — which eked out its IMF bond payment today — are ongoing. Moreover, eurozone stocks sold off overnight as core Euro bond yields keep drifting higher in a reversal of the “Euro QE” trade.
Here at home, Fed officials all seem to be stressing the data dependency of their rate liftoff decision and the fact that the June 17 policy announcement is “live” for a potential rate hike. San Francisco Fed President John Williams admitted Tuesday that the unemployment rate is nearing its natural rate, that it would be safer for the Fed to start raising rates earlier, and the Fed’s ability to delay rate hikes is more limited now.
For now, the Dow continues to be constrained by an inability to break away cleanly from the 18,000 level first reached in early December while market breadth continues to rollover — a sign of vulnerability here.