The June jobs report looms as the next hurdle for a stock market that has gone from gloom to boom with its best weekly performance in nearly two years.
Stocks soared, the dollar slumped and Treasury yields rose in the past week as some U.S. economic data showed signs of improvement and the Greek government adopted austerity measures, allowing it to collect international funding in a temporary solution to its debt struggles.
"I think part of it was the data got better, and people got caught short going into the end of the quarter. Not only was it end of month. It was end of quarter. People became very risk averse. You had the hedge fund guys taking increasingly short positions. Then the data got a little better, and we had Greece," said Richard Bernstein, chief executive officer of Richard Bernstein Advisors.
Bernstein, while still bullish, became more cautious on stocks in the past couple months. "My argument is the data is kind of in the middle of the road. I still think it's going to pay to be optimistic, but I think the data is going to be kind of wishy washy. If we come back in six months, we think the data is going to be better," he said. "I don't think we're completely out of the soup yet."
The big number in the week ahead is Friday's June employment report, expected to show that just 100,000 new jobs were added for the month. Other data includes the ADP private sector jobs report and ISM nonmanufacturing survey on Wednesday. Chain stores report monthly sales on Thursday.
Mark Zandi, chief economist at Moody's Economy.com, like other economists, sees little chance of a pickup in jobs this month or next. He predicts an above average consensus of 125,000 for nonfarm payrolls in June.
"That's still well under the 200,000 we were getting on a consistent basis earlier in the year. This report at least is another one that's going to be subpar...I do predict by September and October, we'll see better numbers and back toward the end of the year, it will get back to 200,000. There are key assumptions. Oil prices can't go back up. That would derail things, and they've (Congress) got to pass this debt ceiling in a reasonable way without derailing things," he said.
All three major stock market indices in the past week had their best week since July 2009. The Dow rose 5.4 percent to 12582; the S&P 500 jumped 5.6 percent to 1339, and the Nasdaq was up 6.2 percent at 2816.
As stocks rose, the bond market tumbled, sending rates higher. The 10-year was yielding 3.199 percent Friday, well above the week earlier's 2.184 percent level. The dollar slid and was down 2.4 percent against the euro, which was at 1.4524. Oil on the Nymex rose 4.2 percent to $94.94, and Brent crude rose 6.3 percent to $111.77 per barrel.
"I think the most important thing will be the U.S. data that comes out. If we get further confirmation there's this bounce going on, I think that's going to be the dominating force," said Jens Nordvig, global head of G-10 foreign exchange strategy at Nomura Securities. "If you look at global markets broadly, one of the things that's important is we had a mega rally in rates, including in countries where central bankers are on a tightening path."
Nordvig expects the dollar to remain under pressure in the week ahead, particularly if the U.S. data are better than expected. "I think in the current environment the dollar is going to be grinding weaker," he said, adding he expects the euro to head toward 1.50. The European Central Bank meets Thursday and is expected to raise interest rates by a quarter of a percentage point.
The U.S. data that got markets excited this past week were the better-than-expected pending home sales, the Chicago purchasing managers report and the national ISM manufacturing index. The June manufacturing data, on the headline, was 55.3, better than the 51.8 expected. The market had been positioned for a particularly weak number the week earlier because of disappointing readings on the Philadelphia Fed survey and the Empire State survey.
Economists looked at the pickup by the ISM as a sign that the slowdown in the economy may be the result of temporary factors, including the supply chain disruption from the Japanese earthquake and the jump in oil and other commodities prices. They caution, however, that the components of the report were not all positive, including a build in inventories and lack of growth in orders.
Zandi points out that the ISM improvement is important because while manufacturing is just 15 percent of GDP and 10 percent of jobs, it represented about half the GDP growth in the past two years. "Manufacturing's contribution this time has been bigger than in any other recovery back to World War II," he said.
Markets are also watching the efforts between Congress and President Obama to reach a compromise on deficit reduction and an agreement to raise the debt ceiling.
Brian Dolan of GFT Forex expects more dollar weakness in the week ahead. "If the market wants to jump on this debt stalemate, that's a nice excuse to jump on the dollar as well. I think these guys are going to take it to the line," he said.
Other data in the coming week include factory orders on Tuesday; weekly jobless claims on Thursday and wholesale trade and consumer credit on Friday. The markets are closed Monday for the fourth of July holiday.
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