With May's soft jobs report, the Fed is boxed in, waiting for fresh data. But stocks are struggling to break out anyway, even without a clear read on interest rates.
Markets have given lower odds to Fed rate hikes this summer, so a Monday speech by Fed Chair Janet Yellen was important in terms of setting expectations.
"If we get a decline in June jobs, and the U.K. opts to stay in the EU, then we have a shot at a July hike. She's clearly leaving all options open," said Diane Swonk, CEO of DS Economics. "Cautious optimism was the dominant theme of her talk, and saying not to make too much about the May employment report."
Stocks rose Monday, after Yellen emphasized the Fed was waiting to see more economic data following May's stunningly bad jobs report, which showed just 38,000 nonfarm payrolls — a miss of about 125,000. There are few catalysts for Tuesday's markets, so traders are watching China's expected foreign reserves data overnight, and U.S. productivity and costs at 8:30 a.m. EDT.
Some strategists say the market will have a hard time breaking out of its current range, but it continues to trade persistently higher with the ending Monday up 10 points at 2,110, a new closing high for 2016.
"We're right at the top of the range for stocks," said John Canally, market strategist and economist at LPL Financial.
"We're at the 2,111 level that we have not cracked like eight or nine times. If the Fed is going to take a slow-go approach, that's going to benefit bonds."
Canally said a lot of investors are neutral and don't know which way to jump. "Is the Fed hiking rates, or not hiking rates, the catalyst for stocks? Does the market want them to raise rates? That's an interesting question. I don't know the answer, and the market has moved on both," he said.
Canally said, like him, a lot of investors are waiting to buy the dips, and there's some concern they are not going to be positioned if there should be a sharp move to the upside. "It's a very, very range-bound market. Most people are waiting around, like we are, to buy the dips as soon as there's a 5 percent dip," he said. "I think too many people are in the neutral camp. The Fed and Brexit are the two big fundamental catalysts and we do need to see some follow-through in earnings."
Ari Wald, Oppenheimer technical analyst, said the stock market acts like it's going to break out. "No real damage has been done of late and we obviously rallied. I'm encouraged by how we rallied. We really have seen the leadership work down the capitalization ladder. ... Usually when you see strength across capitalizations, it tends to characterize rallies that are likely to continue. We think the S&P is continuing to set up new rally highs."
The Russell 2000 index of small-cap stocks ended higher at 1,176, a gain of 1 percent Monday.
In the bond market, yields moved temporarily lower as Yellen spoke. The Fed sensitive yield was at 0.80 percent late in the day, barely changed. Rate hike expectations, based on Fed funds futures, fell after Yellen spoke. Odds for a July rate hike fell to 28 percent for July, from 33 percent before Yellen spoke. Those odds were 63 percent for July before the May jobs report.
Art Hogan, chief market strategist of Wunderlich Securities, said a case could be made for the market to remain trapped — with the S&P in a range between about 2,088 and 2,120, until there is more evidence on the economy. "You've got a conundrum of confusion in economic data right now. If you look over the past two weeks, everything was positive except for jobs creation," he said.
Analysts said the Fed's meeting next week could help clarify its forecasts on interest rates and the economy, which are released after the meeting. The Fed expects two rate hikes this year, and the market basically expects to see that view unchanged, for now.
That leaves Brexit, the U.K. vote on leaving the European Union on June 23, as the next big event.
"Your near-term black swan is that vote. The market is dead convinced they'll remain. If they leave, it's going to be bad. It'll inflate the value of Treasurys. It will inflate gold. Stocks will sell off. Markets have just not priced that in," said Canally.
Besides productivity data, there is consumer credit at 3 p.m. Tuesday and the auction of three-year notes at 1 p.m. EDT.