Investors are turning their attention to the upcoming May nonfarm payrolls report, set to be released on June 5, as they weigh the impact of simmering inflation and potential interest rate hikes on the US stock market rally.
Key Expectations
- Job growth of 96,000 is expected, but a number above 150,000 could fuel fears of an "overheating" economy and push Treasury yields higher, posing a risk to equities.
- The unemployment rate is forecast to remain at 4.3%.
Inflation and Fed Policy
Recent data showed the Personal Consumption Expenditures Price Index (PCE) rose 3.8% year-over-year in April, the largest increase since May 2023, driven by higher energy prices amid the Iran war. This persistent inflation has raised concerns that the Federal Reserve may need to hike rates rather than cut them, contrary to President Trump's wishes.
Market Context
US stocks have rallied strongly this year, with the S&P 500 up over 10% year-to-date, led by technology and AI-related stocks. However, the market remains sensitive to economic data and geopolitical risks.
Broadcom Results Test AI Trade
Semiconductor firm Broadcom reports quarterly results on Wednesday, which could impact the red-hot AI trade. The Philadelphia SE Semiconductor Index has surged about 80% since its March low, while Broadcom shares climbed 45%.
Bond Yields a Key Risk
Rising bond yields are a concern for equities, as they translate to higher borrowing costs and create competition for stocks. The 10-year Treasury yield currently sits around 4.46%.
Other Data to Watch
Next week also includes reports on manufacturing and services sector activity. Another key inflation report the following week will be among the last data before the Fed's June 16-17 meeting.
Bottom Line
A hot jobs report could reignite inflation fears and increase the likelihood of rate hikes, potentially derailing the stock market rally. Conversely, a weaker report might calm those fears and support equities.
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