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Upbeat Jobs Report Unable to Lift Equities




U.S. equities closed out the week lower, posting weekly declines in the process, as an upbeat May labor report was unable to fend off continued anxiety over a long list of global headwinds, chiefly inflation and its implications on the Fed's aggressive stance. The employment report showed job growth was stronger than expected, the labor force participation rate ticked higher, and wage growth moderated compared to last year. Upbeat reports on the earnings front also offered little sway, as Lululemon Athletica topped earnings estimates and raised its guidance, along with CrowdStrike. In other equity news, Elon Musk reportedly suggested Tesla needs to reduce its workforce, and Turning Point Therapeutics surged after agreeing to be acquired by Bristol-Myers Squibb Company in a deal valued at roughly $4.1 billion. In other economic news, May services sector reports showed growth decelerated. Treasuries were lower, lifting yields, and the U.S. dollar gained ground, while crude oil prices were higher, and gold was lower. Europe finished out the week with losses and Asia was mixed, though markets in the U.K., as well as mainland China and Hong Kong were closed for holidays.

The Dow Jones Industrial Average fell 349 points (1.1%) to 32,900, the S&P 500 Index lost 68 points (1.6%) to 4,109, and the Nasdaq Composite declined 304 points (2.5%) to 12,013. In light-to-moderate volume, 3.7 billion shares of NYSE-listed stocks were traded, and 4.1 billion shares changed hands on the Nasdaq. WTI crude oil moved $2.00 higher to $118.87 per barrel. Elsewhere, the gold spot price was down $17.70 to $1,853.70 per ounce, and the Dollar Index gained 0.3% at 102.15. Markets were lower for the week, as the DJIA shed 0.9%, the S&P 500 decreased 1.2%, and the Nasdaq Composite fell 1.0%. Tesla Inc. (TSLA $704) saw some pressure after Reuters reported that Chief Executive Officer Elon Musk said the electric vehicle maker needs to cut staff by around 10.0% in an email sent to executives titled "pause all hiring worldwide." The report also said Musk noted that he has a "super bad feeling" about the economy. TSLA did not comment on the report.

Lululemon Athletica Inc. (LULU $301) reported Q1 earnings-per-share (EPS) of $1.48, above the $1.43 FactSet estimate, as revenues rose 32.0% year-over-year (y/y) to $1.6 billion, roughly in line with the Street's forecast. Q1 same-store sales grew 28.0% y/y, north of the forecasted 20.4% increase. The athletic apparel, footwear, and accessories company said it saw continued momentum in its business as it successfully navigated the challenges within the macro environment. LULU raised its full-year earnings and revenue guidance. Shares were lower.

CrowdStrike Holdings Inc. (CRWD $162) posted adjusted Q1 EPS of $0.31, above the expected $0.23, with revenues increasing 61.0% y/y to $488 million, north of the forecasted $464 million. The cybersecurity company said its subscription revenue rose 64.0% y/y, and its annual recurring revenue (ARR) was 61.0% higher y/y. The company said it saw strength across its platform including a record quarter for modules deployed in the public cloud and 100% growth for its emerging product group, which includes its Discover, Spotlight, Identity Protection and Log Management modules. CRWD raised its full-year EPS and revenue guidance. Shares traded lower.

In M&A news, shares of clinical-stage precision oncology company Turning Point Therapeutics Inc. (TPTX $75) surged over 115% after agreeing to be acquired by Bristol-Myers Squibb Company (BMY $75) for $76.00 per share in an all-cash transaction for a total consideration of $4.1 billion in equity value. BMY traded slightly lower.

The S&P 500 remained choppy this week after snapping a streak of seven-straight weekly declines last week with investors continuing to grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest Mid-Year Outlook: U.S. Stocks and Economy, how sharp, countertrend rallies may continue this year, but aggressive Fed policy, the turning of the liquidity tide, and slower economic growth will likely keep pressure on stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary, including our latest article, Stock Market Volatility: Schwab's Quick Take, on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.


May employment report shows job growth above estimates, services sector reports soften Nonfarm payrolls (chart) rose by 390,000 jobs month-over-month (m/m) in May, compared to the Bloomberg consensus estimate of a 318,000 rise, while April's figure was adjusted upward to an increase of 436,000 from the initial reading of a 428,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 333,000, versus the forecasted rise of 301,000, after increasing by 405,000, revised lower from the preliminarily reported 406,000 gain in April. The labor force participation rate increased to 62.3% from April's unrevised 62.2% figure, matching forecasts.

The unemployment rate remained at 3.6%, with forecasts calling for it to dip to 3.5%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—increased to 7.1% from the prior month's 7.0% rate. Average hourly earnings were up 0.3% m/m, below projections of a 0.4% increase, and matching April's rise. Compared to last year, wages were 5.2% higher, in line with forecasts and down from April's 5.5% rise. Finally, average weekly hours held at April's unrevised 34.6, matching expectations.

The May Institute for Supply Management (ISM) Services Index (chart) showed expansion in the key services sector slowed more than expected. The index declined to 55.9, from the 57.1 in April, and versus estimates of a decrease to 56.5. A reading above 50 denotes expansion in activity. A deceleration in business activity more than offset an acceleration in new orders and a slight uptick in employment m/m, which moved slightly back into expansion territory. Meanwhile, new export orders rose, inventories declined, and prices paid decreased from the prior month's record level.

The final May S&P Global Services PMI Index was revised lower to 53.4 from the preliminary 53.5 level, where it was forecasted to remain, and below April's reading of 55.6. A reading above 50 denotes expansion.

Treasuries were lower following the employment data, with yields seeing some upward momentum this week as markets anticipate tighter Fed monetary policy amid the backdrop of persistent inflation and signs of slowing economic growth.

As the Fed launches a series of rate hikes to try to cool off inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' 2022 Mid-Year Outlook: Fixed Income in which she discusses how returns should be better for fixed income investors in the second half of 2022, now that interest rates have reset higher. However, we still expect volatility to remain high as central banks shift away from easy-money policies. Be sure to follow Kathy on Twitter: @KathyJones. Amid this backdrop also check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes.

The yield on the 2-year Treasury note rose 4 basis points (bps) to 2.67%, the yield on the 10-year note gained 3 bps to 2.94%, and the 30-year bond rate advanced 2 bps to 3.09%.


Europe lower to close out the week


European equities finished lower, with the markets digesting today's stronger-than-expected U.S. May employment report and wrestling with the implications of Fed monetary policy. Yesterday's production decision by OPEC and its allies, known as OPEC+, which pledged to increase output by 216,000 barrels per day in July and August also remained in focus as oil prices moved higher. Meanwhile, the U.K. markets remained closed for a holiday. Inflation concerns have festered after this week's 8.1% rise in May consumer prices, which extended a string of record high prints, but this week we did see Eurozone producer prices rise 1.2% m/m in April, a noticeable slowdown from the 5.3% increase in March, and below the expected 2.0% gain. In economic news in the region today, the Eurozone Services PMI for May was revised to a smaller pace of growth than initially expected, while Eurozone retail sales unexpectedly fell for April, and German export growth rose more than expected for April. The markets continued to face a flurry of headwinds, exacerbated by this week's news that leaders in the European Union have reached an agreement to ban most Russian oil by the end of the year as a result of the ongoing war in Ukraine. Additionally, inflation concerns have prompted tighter monetary policies out of the Fed and the Bank of England, while boosting expectations that the European Central Bank will raise rates later this year. This along with signs of slowing economic growth has increased worries about a possible looming recession, but global sentiment seemed to get some relief as China begins to ease COVID-induced lockdowns.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest commentary, The Three Bears?, discussing how stocks, bonds, and cash are all in a bear market or teetering on the edge of one—a very rare event. He points out how over the past 72 years, there have only been two prior periods with a triple bear. Jeff adds that a bull market is likely to return, as it typically has, but the timing is in question. He notes how every period is different and there can be no guarantees, but it is worth noting that the prior periods featuring any of these three bears were often very brief. You can follow Jeff on Twitter: @JeffreyKleintop. The euro and British pound were both lower versus the U.S. dollar, while bond yields across Europe were higher.

France's CAC-40 Index, Germany's DAX Index, Spain's IBEX 35 Index and Switzerland's Swiss Market Index all declined 0.2%, while Italy's FTSE MIB Index dropped 1.1%.


Asia mixed with China and Hong Kong closed


Stocks in Asia were mixed as the many headwinds worldwide remain, but on the heels of the solid gains seen in the U.S. yesterday, which shrugged off persistent inflation that has forced tighter monetary policy action and threatened global economic growth. China meanwhile has moved in the opposite direction pledging stimulus measures as COVID lockdowns continue to hamper activity. However, COVID infections in China have fallen, allowing some easing in lockdown restrictions, which has helped soothe some of the concerns about a prolonged slowdown of the world's second largest economy. Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output.

In economic news, a host of May Services PMIs were digested with reads in Japan and Australia being revised to higher rates of expansion than previously reported, while India's services sector expansion accelerated. Additionally, South Korea's consumer price inflation came in hotter than expected for May.

Japan's Nikkei 225 Index advanced 1.3%, with the yen holding onto this week decline versus the U.S. dollar, which came after a recent rebound from the sharp drop seen in March and April. Australia's S&P/ASX 200 Index increased 0.9%, and South Korea's Kospi Index rose 0.4%, but India's S&P BSE Sensex 30 Index dipped 0.1%. Volume was lighter than usual as markets in mainland China and Hong Kong were closed for a holiday.


Stocks post weekly decline after last week's rally


U.S. stocks gave back some of last week's rally that snapped a string of weekly declines. The flurry of headwinds remained, chiefly persisting inflation concerns that has forced the Fed to get aggressive with its monetary policy tightening, which comes amid signs of slowing global economic growth that has been exacerbated by slumping economic activity in China amid COVID-induced lockdowns. All major S&P 500 sectors finished lower, except for Energy which continued to decisively outperform. Crude oil prices climbed for a seventh-straight week as demand continued to outstrip supply, amplified by the ramifications of the ongoing war in Ukraine that has stymied a key energy source. A decision by OPEC+ to boost production in July and August appeared to have little impact on cooling off the surging price of oil. Stocks fell despite some solid economic reports as Friday's upbeat labor report was met with a larger-than-anticipated acceleration in the ISM Manufacturing Index, a smaller-than-forecasted deterioration in Consumer Confidence, and moderating initial jobless claims. The U.S. dollar resumed some recent strength, and Treasury yields regained some upward momentum to add other layers of concerns about financial conditions tightening.

Next week, earnings season will offer little for the markets to decipher, yielding to the economic calendar as the Fed's June 15 monetary policy looms. The May inflation picture will begin to develop, with the release of the Consumer Price Index (CPI), which is likely to headline the docket amid the intensive focus by the Fed to try to cool off surging pricing pressures. We will also get a timely read on the all-important U.S. consumer in the form of the preliminary June University of Michigan Consumer Sentiment Index. Other reports due out next that could garner some attention include initial jobless claims for the week ended June 4, and the trade balance for April. The markets will get a reprieve from FedSpeak as the Central Bank goes dark a week ahead of its monetary policy decision.

Next week's international economic calendar will also offer some data points that may command some focus with releases worth noting including: Australia—inflation statistics and the Reserve Bank of Australia's monetary policy decision. China—Services PMI, lending statistics, trade balance, and CPI and wholesale price inflation figures. India—Reserve Bank of India's monetary policy decision and industrial production. Japan—household spending, wages, machine tool orders, and wholesale price inflation. Eurozone—European Central Bank monetary policy decision, along with German factory orders and industrial production. U.K.—the Bank of England's 12-month inflation forecast.

 

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