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Key Takeaways:

  • Salesforce
    CRM
    , Costco, Gap
    GPS
    beat top, bottom line expectations
  • European Commission index showing economic sentiment rose more than expected in May
  • Core PCE price index hotter than expected; market shows little initial reaction

Welcome to the last trading day before a well-deserved holiday break. As investors get ready to leave their desks and fire up their grills, it seems that worries about an overheating economy are taking a back seat to encouragement about the economic recovery.

Before jumping in, we’d like to take a moment to remember the nation’s military personnel past and present. All gave some and some gave all. Please keep those who gave their lives for our country in your thoughts and prayers.

Optimism about the UK opening back up seems to have helped European stocks overnight, as did positive sentiment from yesterday’s encouraging U.S. unemployment claims report. European shares also got a boost from a European Commission index showing economic sentiment rose more than expected in May.

Turning to data on this side of the pond, the core (ex food and energy) personal consumption expenditures price index–the Fed’s preferred inflation gauge–showed a rise of 0.7%, slightly more than the 0.6% expected in a Briefing.com consensus. That brought the annualized rate to 3.1%, well above the Fed’s target of 2%.

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The figure comes at a time when investors have been worried about inflation as the economy gains steam following a deep slump caused by the pandemic. But those worries seem to have eased, and the yield on the 10-year Treasury has pulled back somewhat from recent highs. The Fed has said it thinks rising inflation is transitory although policy makers have also discussed “beginning a conversation” on tapering its bond-buying program.

And speaking of energy, crude oil (/CL) has been on a tear over the past week. Early indications show crude may be headed for its sixth positive session in a row. Notably, it’s starting the morning in the mid-$67 range, a level that has offered a bit of resistance this spring (see chart below). Technical traders might see this week’s crude activity as having paved the way for a shot at $70–a level that’s been elusive since the fall of 2019.

Meanwhile, Salesforce.com (CRM), Costco (COST), and Gap (GPS) all reported earnings and revenue that exceeded analyst expectations, and GPS issued an encouraging forecast.

As the day wears on, keep in mind that volume may taper down, meaning you might want to be extra careful about the size of your trades heading into the afternoon.

That economic recovery showed more encouraging signs yesterday. Weekly jobless claims fell more than expected to 406,000, a new pandemic low that was well under the Briefing.com consensus estimate of 425,000. The new figure marked the third week in a row below 500,000. (See our deep dive into the labor market below.)

The economic optimism may have motivated some investors to shift some money out of tech and other growth stocks and into cyclical names, with Industrials, Financials, and Materials names the best performing sectors Thursday.

The jobless claims news also helped boost the yield on the 10-year Treasury, further dampening the appeal of growth stocks, which often rely on expectations of future growth to derive much of their valuations. Inflation threatens that outlook.

Meanwhile, cyclical stocks got another boost on news of a Republican infrastructure proposal. While it’s smaller than what Democrats had been calling for, it still feels like there’s impetus from both sides that some kind of deal gets done.

Next week’s earnings schedule is light as corporate reporting season ebbs. But cannabis investors will likely want to tune in when Canopy Growth Corp. (CGC) opens its books on Tuesday before the opening bell. The stock has lost more than half its value since this year’s peak above $50 in February as excitement over pro-pot victories in last year’s election faded, heightened retail speculation from earlier this year eased, and other cannabis company results have been lackluster.

Another stock investors may want to pay attention to is Zoom Video Communications (ZM), which reports after the close on Tuesday. The company has been a poster child for stocks benefiting from people being stuck at home. But as the lockdown mentality eases in the United States, it could be interesting to see how the company pivots. Still, the new normal will probably involve more remote working than the pre-pandemic economy, leaving Zoom in demand, if not as much as during the height of domestic lockdowns.

Turning to the economic calendar next week, investors are scheduled to get data on construction spending, the domestic manufacturing and service sectors, factory orders, and non-farm payrolls in addition to the Fed’s Beige Book. Of course, the weekly jobless claims numbers will also probably be closely scrutinized.

Labor Market Tightness? Remember the pre-pandemic labor market tightness that surprised people by not resulting in high inflation? We seem to be a lifetime away from that now, but Dallas Fed President Robert Kaplan thinks labor market tightness is returning. That can seem counterintuitive given the disappointing showing in the last employment situation report. But Kaplan and colleagues argue in the Dallas Fed’s blog on Thursday that the sluggish jobs growth may not signal weak demand for labor from firms like such numbers might have in the past. He says lingering health concerns, working mothers staying home to care for children, generous unemployment insurance benefits, and decisions to retire or prioritize other activities may be causing previously employed people to not be actively looking for work or looking with low intensity.

Supply and Demand: Looking behind the headline jobs number, Kaplan says other indicators suggest the jobs number has been depressed primarily because of the supply side, not the demand side. He notes that jobs are relatively abundant for people who are looking for work, and employed people in March quit their jobs at a rate equal to the record high seen in 2019. “A high quits rate has been consistent with a tight labor market, as workers are confident enough to leave their current positions in order to pursue better opportunities,” he writes. Additionally, wages have been on the rise, former employees have been reluctant to return to their old jobs, and teenage employment has fully recovered.

Fuel for the Fire? Kaplan’s comments come at a time when investors have been worrying about inflation as the economy recovers. The argument has been that a spike in demand for goods and services will outstrip supply, causing prices to rise. We’re already seeing rising commodities prices. But rising wages seem to largely have been absent from the mainstream discussion until now. Kaplan’s view raises the question of whether companies competing amid a smaller pool of workers could end up substantially exacerbating the inflation situation along with rising raw materials prices. If rising wages do contribute meaningfully to inflation, that would have implications for the growth-vs-cyclical seesaw ride the market has been on and could help hasten the beginning of tapering and even rate hikes.

TD Ameritrade(R) commentary for educational purposes only. Member SIPC.

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