Stocks Bounce of Lows, but Conviction Lacks…..

U.S. equities were able to come off their lows of the day, but finished in the red, as conviction remained sparse and volatility persisted. The choppiness came as the markets continue to contend with persistent inflation that has the Fed stepping up its monetary policy tightening campaign. The Fed’s aggressive stance comes amid signs of slowing economic growth, though a key read on manufacturing activity for May from the ISM unexpectedly accelerated, but was preceded by another sign of manufacturing contraction out of China. In other economic news, mortgage applications fell for a third-straight week, job openings moderated but remained robust, and construction spending missed forecasts though the prior month was revised higher. Earnings reports continued to trickle in, with Dow member Salesforce topping earnings forecasts but issuing mixed guidance, while Delta Air Lines raised its guidance despite higher costs, and HP exceeded profit projections and increased its full-year outlook. Treasuries were lower to lift yields, and the U.S. dollar rallied, while crude oil prices rose, and gold gained modest ground. Europe finished lower as the markets grapple with the flurry of headwinds, while Asia was mixed.

The Dow Jones Industrial Average declined 177 points (0.5%) to 32,813, the S&P 500 Index lost 31 points (0.8%) to 4,101, and the Nasdaq Composite fell 87 points (0.7%) to 11,994. In moderate volume, 4.5 billion shares of NYSE-listed stocks were traded, and 4.6 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.59 higher to $115.26 per barrel. Elsewhere, the gold spot price was up $3.00 to $1,851.40 per ounce, and the Dollar Index gained 0.8% to 102.54.

The S&P 500 snapped a streak of seven-straight weekly declines last week but is down so far this week as choppiness in the markets remains with investors continuing to grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign.

May manufacturing reports mixed, job openings remain robust, mortgage apps fall for third week…..

The May Institute for Supply Management (ISM) Manufacturing Index showed manufacturing growth (a reading above 50) unexpectedly accelerated. The index rose to 56.1 from April’s 55.4 level, and versus the consensus Bloomberg estimate of a decrease to 54.5. The stronger-than-expected report came as both growth in new orders and production accelerated, along with inventories. However, employment declined and moved back into contraction territory, but supplier delivery times decelerated. Inflation pressures did decline but remained severely elevated, with prices paid decreasing to 82.2.

The ISM said, “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. Despite the Employment Index contracting in May, companies improved their progress on addressing moderate-term labor shortages at all tiers of the supply chain, according to Business Survey Committee respondents’ comments. Panelists reported slightly lower rates of quits compared to April. May was a second straight month of slight easing of prices expansion, but instability in global energy markets continues.”

The final May S&P Global U.S. Manufacturing PMI Index was unexpectedly revised lower to 57.0, compared to estimates calling for an unrevised 57.5 level. The index was below April’s reading of 59.2. A reading above 50 denotes expansion.

S&P Global said the report signaled, “a further improvement in operating conditions during May, but the rate of growth eased to the softest since January as expansions in output, new orders and stocks of purchases waned. That said, overall demand conditions remained robust, with firms stepping up their hiring activity amid a sharp uptick in backlogs of work. Business confidence, however, slipped to the lowest since October 2020. Meanwhile, supply constraints and inflationary pressures remained key themes, hampering output growth and stockpiling efforts. The rate of cost inflation accelerated to the fastest in six months, with firms passing on higher expenses to customers through a near-record rise in output charges.”

The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, showed a decrease to 11.4 million jobs available to be filled in April, from March’s upwardly-revised level of 11.9 million. The estimate called for a 11.4 million level. The report showed the hiring rate remained at March’s 4.4% level, and separations dipped to 4.0% from the prior month’s 4.1% pace. The quit rate held at March’s 2.9% pace.

Construction spending rose 0.2% month-over-month (m/m) in April, versus projections of a 0.5% gain and compared to March’s favorably-revised 0.3% rise. Residential spending grew 0.9%, more than offsetting a 0.4% decline in non-residential spending.

The MBA Mortgage Application Index declined 2.3% last week, following the prior week’s decrease of 1.2%. The index was down for a third week as a 5.4% drop in the Refinance Index was accompanied by a 0.6% decrease for the Purchase Index. The decline came even as the average 30-year mortgage rate fell 13 basis points (bps) to 5.33%, but is up 216 bps versus a year ago.

Treasuries were lower, and yields have regained some upward momentum this week as markets anticipate tighter Fed monetary policy amid the backdrop of persistent inflation and signs of slowing economic growth. In afternoon action, the Fed released its Beige Book, an anecdotal read on business activity across the nation which is used to prepare for the next monetary policy decision set for June 15. The report showed that most Districts saw “slight to modest” economic growth since mid-April, while four districts noted that the pace of growth slowed. Most respondents noted that price increases rose at a “strong or robust” clip, with about half of the Districts reporting the ability to pass along higher prices to consumers, but also noting some “customer pushback, such as smaller volume purchases or substitution of less expensive brands.” The report also showed that contacts reported continued labor market difficulties as the greatest challenge, followed by supply chain disruptions.

The yield on the 2-year Treasury note was up 13 bps at 2.67%, the yield on the 10-year note rose 8 bps to 2.93%, and the 30-year bond rate gained 4 bps to 3.09%.

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