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Week Ahead: A June Swoon for Markets?

If the stock market is going to see a June swoon, Friday's jobs report could be as good a trigger as any.

"I think the whole question now is the second half of the year. The Fed and many others, like myself, still have a relatively optimistic view about the economy. It's not gangbusters, but not terrible. I think the second half is key. If we see ourselves marking down second half forecasts, I think there's some meaningful implications." -Chief Economist, RBS, Michelle Girard

Stocks come off a tension-filled week where investors tried to bid risk assets higher, but were stymied by Europe's sovereign debt woes and a batch of soft U.S. economic reports. At the same time, buyers sought safety in the U.S. bond market, driving the yield on the 10-year to a six-month low. As interest rates moved lower, so did the dollar, which finished the week nearly a percent lower against the euro and yen.

The S&P 500 was down just 0.2 percent in the past week to 1331, and is down 2.4 percent for the month of May on four weeks of losses. The Dow was down 0.6 percent for the week to 12,441. The Dow has also suffered four weeks of losses, its longest losing streak since February, 2010. It is now down 2.9 percent for the month of May, and it has traded poorly in the month of June for the past decade. It has only had two positive Junes since the year 2000.

"We've been at 1330 on the S&P really since February," said Jeff Kleintop, chief investment strategist at LPL Financial. "I think we've been here for months, and we'll be here for months. I think we're going to continue to get this volatility within a tight range."

The coming week's focus is on the May employment report Friday, but also monthly auto sales and May ISM manufacturing data Wednesday. Chain store sales are reported Thursday. Investor focus will also be on Europe where officials continue to struggle for a resolution to the Greek debt crisis.

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AP

"We're going through a transition from recovery to modest, sustainable growth," Kleintop said. He said the next big hurdles for stocks are the end of the Fed's quantitative easing program at the end of June, and the Congressional dithering over the U.S. debt ceiling, which must be resolved by August.

"We had a lot of disappointing data. I think the whisper numbers on ISM (manufacutring) and the jobs are well below what the consensus is. Even if we get an in-line number that could lead to a bounce here" in stocks, he said.

Soft Patch

In the past week, some economists tweaked their forecasts for the current quarter as manufacturing, consumer spending and housing data came in weaker than expected. But some of those economists are not changing their forecasts for the second half of the year, since they see some of the factors for the current weakness as transitory so far.

"One thing that's helped to keep the pessimism about the economy at bay is the fact that there was some relief about commodities prices," said RBS chief economist Michelle Girard. "I think the whole question now is the second half of the year. The Fed and many others, like myself, still have a relatively optimistic view about the economy. It's not gangbusters, but not terrible. I think the second half is key. If we see ourselves marking down second half forecasts, I think there's some meaningful implications."

"If we start to give up on our expectations for an acceleration in the second half, that has implications for the Fed outlook. That doesn't necessarily mean QE3 (a third quantitative easing program)," she said, adding it could just mean that the Fed delays a tightening cycle. Under the Fed's quantitative easing program, it is purchasing $600 billion in Treasury securities, which in theory holds down rates and pushes investors into riskier assets.

When the Fed first announced the plan in late August, it sparked a rally in equities and commodities. Now, the equities market is full of chatter that the Fed will have to embark on another easing program because of the sluggish economy, though many economists doubt it.

Job Predictions, S&P Forecasts

Jobs, Jobs, Jobs

Girard tweaked her forecast for second quarter growth to 2.7 percent, but maintains 4 percent for the second half of the year. "I think the real risk is that people get too negative about the economy. I think the (May) employment numbers are going to be a bit of a disappointment. We've got a below-consensus number of only 150,000. I fear that the April numbers are as good as we get for a while," she said. April non farm payrolls totaled 244,000.

Goldman Sachs economists Friday said they were also expecting non-farm payrolls of 150,000. The Goldman economists cut their second quarter growth forecast to 3 percent this week, blaming the Japanese supply chain disruption for a half point reduction. On Friday, they said, in a note, that they expect a pick up in late June as Japanese auto makers begin to ramp up, but if the U.S. data does not improve then, they will further downgrade their forecast.

Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi, also expects a weaker jobs number and weaker manufacturing readings this week, when the ISM survey is reported Wednesday. He said that number could fall from 60.4 to 57, still a number showing expansion.

This week's data will reveal more detail about the impacts of higher gasoline prices, and also the supply chain disruptions resulting from the Japan earth quake, two things economists see as temporary problems for the economy. Car sales, for instance, are seen dropping in May to an annualized selling rate of 12.2 million, from an annualized rate of about 13.1 million in April.

While gasoline prices are now falling, chain stores sales should show the impact of a consumer that withheld spending as gas prices peaked in mid-May. Gasoline at the pump has fallen to a national average of $3.80 from $3.98, according to AAA. Gasoline experts say it should continue to drop and has likely hit its high for the year.

Nymex crude oil this past week gained $0.49 to $100.59 per barrel, and gasoline futures were up 5 percent at $3.092 per gallon, the highest level since May 11.

Rupkey said consumers get used to higher gasoline prices, but they react to the initial shock of rising prices. "The initial surge causes people to move to the sidelines and cut their spending. Then they get used to it...that's one reason to not get too pessimistic about the outlook here," he said.

Bonds vs. Stocks

But Rupkey does have concerns about the May employment report. "I'm not going to be shocked if it's 110,000. I don't think that changes my forecast for the whole year. I don't think we're going to go off the rails for this. A slowdown can't be ruled out," he said.

Job seekers wait in line to have their résumés reviewed at the second annual Anaheim/Orange County Job Fair.
Robyn Beck | AFP | Getty Images
Job seekers wait in line to have their résumés reviewed at the second annual Anaheim/Orange County Job Fair.

"I would say this (jobs) number is extremely uncertain next week. But the bond market rally is pretty strong. It wouldn't take much to send yields plummeting through the 3 percent floor...I'm a little worried here. A lot of money is betting on lower rates," he said.

The 10-year yield finished Friday at 3.077 percent. Bond traders had been watching the technically important level of 3.07 and also 3.05.

MacNeil Curry, BofA Merrill Lynch technical strategist, said something has to give in the tug of war between equities and bonds. He noted that on Thursday, the S&P 500 held its 100-day moving average support, at 1315, while the 10-year rallied and the yield closed below the 200-day moving average (3.08) for the first time since December.

"The last time we were this extended was back in November. Equities were correcting," he said.

This time, Curry expects to see bond yields rise, as sellers step in, and he is also expecting to see stocks move higher. "If you look at the price action in the last couple of days, the market that doesn't follow through on data that's worse-than-expected is a bull market," he said. Curry said the S&P 500 could be at 1380 within the next month and a half.

He said if the 10-year yield does break 3 percent it would be just slightly under in a temporary move. "I think it will be rates that will trade up to 3.40, not equities that will trade down," he said.

Econorama

Besides the employment report, data this coming week includes S&P/Case Shiller, Chicago PMI, and consumer confidence on Tuesday. Wednesday's data includes ADP employment report, the ISM manufacturing data, and construction spending. On Thursday, there are weekly jobless claims, productivity and costs, and factory orders. The ISM non manufacturing survey is Friday.

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