Wall Street Rally Takes a Breather Ahead of Jobs Friday: Jun. 6, 2024

Markets are struggling for direction today following yesterday’s stellar gains on the back of Ottawa kicking off a synchronized monetary policy easing cycle. Indeed, the EU followed suit this morning, dropping its key rate by 25 bps. Bullish trading action in recent days has been motivated by the expectation that the Fed will follow suit, as bond investors incrementally expand expectations for an accommodative central bank. Tomorrow’s jobs report may certainly move the needle ahead of the Fed meeting next week, which will feature the committee’s quarterly update to its Summary of Economic Projections alongside an estimate of year-end fed funds.

Another Softer Labor Figure

This morning’s unemployment claims data added modest evidence pointing to a slowing labor market, with layoffs picking up slightly. Initial unemployment claims rose to 229,000 during the week ended June 1, exceeding estimates of 220,000, which would’ve been closer to the former week’s 221,000. Continuing claims increased but more modestly to 1.792 million for the week ended May 25, near expectations of what would have been an unchanged 1.79 million. Four-week moving averages reflected mild changes, with initial and continuing claims shifting from 223,000 and 1.786 million to 222,250 and 1.789 million, respectively.

ECB Accommodates but Raises Inflation Forecast

The European Central Bank (ECB) delivered its highly anticipated rate cut this morning with a 25-basis point (bp) reduction, bringing its key figure to 3.75% from a record high. According to an ECB Governing Council statement, the central bank brought out the scissors after determining that slower price pressures and an underperforming economy needed it. At the same time, the bank increased its inflation estimate for this year from 2.3% to 2.5%. It also raised its 2025 outlook from 2% to 2.2%. The ECB action follows yesterday’s decision by the Bank of Canada to lighten up, making it the first member of the Group of Seven to dust off its cutlery. 

Consumer Weakness Weighs on Retailers’ Results

Recent earnings releases depict consumers cutting back on spending as inflation hurts households’ spending clout. This trend extends across athleisure, deep discounters, lingerie and alcohol companies. Consider the following earnings highlights:

• Lululemon reported flat year-over-year (y/y) same-store sales in North America and attributed the disappointing results to inventory issues and a slowing economy. It ran out of products in the most frequently sought sizes and its color variety was too narrow. On a global basis, same-store sales, which exclude results of new stores, climbed 6% y/y, missing the analyst consensus expectation by one percentage point. CEO Calvin McDonald says the company is generating strong momentum in foreign markets. For the quarter, both earnings and revenue exceeded analysts’ expectations. Its earnings and revenue guidance for the current quarter fell below analysts’ expectations, but full-year guidance exceeded estimates, implying stronger results for the second half of 2025. The company’s shares jumped 10% last night following the earnings release.
• Five Below said its low-income customers are suffering from an outsized impact of years of inflation, causing the discount retailer to lower its guidance. For the first quarter ended May 4, the company posted an unexpected 2.3% decline in comparable sales, a measurement of stores operating for at least 15 months and ecommerce. Earnings and revenue also missed analyst consensus estimates. The company anticipates comparable sales will decline 5% during its fiscal year that ends in February. It lowered its earnings and revenue guidance to below analysts’ expectations. Last March, the company said it was limiting self-checkout options and hiring more security guards to reduce theft. More recently, it started testing price reductions. Its shares dropped more than 18% after last night’s earnings release.
• Victoria’s Secret also posted disappointing results: its total first-quarter revenue declined 3.4% y/y and comparable sales fell 5%. While revenue missed the consensus estimate, earnings exceeded expectations. The company said store traffic increased during the quarter, but promotional competition was strong. Additionally, the company’s results improved from the prior quarter. For the current quarter, Victoria’s Secret is anticipating another decline in sales. Its share price dropped approximately 3% following the earnings release.
• Remy Cointreau, a French maker of Remy Martin cognac and Cointreau orange liquor, said it expects efforts to reduce its Americas US inventory to linger well into the current fiscal year which ends in March of 2025. Demand for cognac in the US still hasn’t recovered after dropping from high levels during the Covid-19 pandemic, says Chairwoman Marie-Amelie de Leusse. Globally, sales declined 19% during the fiscal year ended March 30.

All Calm on Wall Street

Wall Street is quiet today as investors await tomorrow’s jobs report that may either greenlight the equity rally or create selling pressure. Against this backdrop, equity indices are generally tilting lower while bonds are paring some gains. The Dow Jones Industrials, up 0.1%, is the only gainer, while the Russell 2000, S&P 500 and Nasdaq Composite benchmarks are down 0.5%, 0.1% and 0.1%. Sectoral breadth is split and sporting a defensive tilt as 6 out of 11 sectors trade green. Leading the upside are consumer staples, communication services and healthcare with gains of 0.5%, 0.5% and 0.3%. Treasurys appear tired with investors potentially anticipating higher costs of capital. The 2- and 10-year maturities are yielding 4.73% and 4.29%, 1 and 2 bps loftier on the session. The dollar is near the flatline, meanwhile, as it gains versus the yuan and pound sterling but loses ground relative to the euro, franc, yen and Aussie and Canadian dollars. Commodities are recovering from their recent battering as monetary policy easing prospects calm demand concerns. Silver, lumber, crude oil, copper and gold are all higher by 3.1%, 2.7%, 1.1%, 1% and 0.7%.

Pivotal Jobs Friday

This week’s employment data has featured softer-than-expected figures on JOLTS, ADP and unemployment claims, but tomorrow’s employment situation report will carry the most weight for investor sentiment and the Fed’s decisions. I’m expecting another miss tomorrow with the headline figure arriving at 165,000 alongside wage growth of 0.3% and the unemployment rate ticking up to 4%. The numbers are likely to bolster rate reduction projections further, but Fed officials will want more labor market moderation considering recent miscues. In conclusion, next week’s inflation data will finally offer the first month of price pressures rising at a pace consistent with the central bank’s 2% objective in the very short-term, a month over month rate of just 0.1%. Whether the market focuses on liquidity arrivals from the Fed or earnings prospects against the backdrop of rising joblessness is an answer we’ll have tomorrow morning. 

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