Stocks Fade on Jobs Data and Growing Risk of Recession

Equities extended losses for the second day as the Labor Department’s JOLTS report showed job openings unexpectedly surged to over 10 million in April - the highest number in three months. While this release reinforced speculation the Federal Reserve will have room for another interest-rate hike over the next two meetings, it’s very hard to lend to much credence to this data point.


Here's why we should all take it with a grain of salt...

Over the last year, several economists that have questioned the reliability of JOLTS data given the survey’s response rate. At the end of 2022, it was as low as 31%, or about half of what it was before the pandemic. In other words, the Fed is using a really small sample group to make some very big decisions about policy.


The Fed might well develop a healthy skepticism toward this data. If this is the case, with the stress in the banking sector, along with the debt-ceiling drama, we could very well see a pause in interest rate hikes.


China’s economy, with its "growth story" that never materialized, is also having an impact on U.S. markets. Our oil, copper, semiconductor, and many other industries bank on China's economic performance, the demand it drives and the supply it provides, to draw revenue. Chinese shares are now tumbling as investors are becoming increasingly pessimistic about the country’s economic recovery in the near term. Its stocks are now back in a bear market after rallying earlier this year.


On top of that, there’s a growing, not shrinking, risk of a U.S. recession, and with the S&P 500 dropping below its key 4,200 level, technical traders are watching for a breakdown.


Banking and "Bad Breadth"


The SPDR S&P Regional Banking ETF (KRE) dropped 3% yesterday, with traders combing through Federal Deposit Insurance Corp’s remarks that the number of lenders with weakness increased in the first quarter. This was not a small change either; U.S. bank deposits dropped by the most since the early 1980’s banking crisis.


Equities remain extremely vulnerable as the market heads into the last month of the quarter. By now, everyone is well aware of the market’s breadth problem, and according to Jonathan Krinsky at BTIG, “We think June will show the risks when the weak remain weak, and the strong unwind lower.” Garrett Baldwin is in the same camp, watching only a few mega cap stocks support the entire market.


Traders continue to watch the latest developments in Washington, with the debt-limit deal struct by President Joe Biden and House Speaker Kevin McCarthy heading towards a vote today in the House of Representatives. Success or failure here could create a tipping point in the market given everything else happening.


Economics and Earnings


It seems like every day a Federal Reserve Governor is saying "yes" or "no" to a pause and this just what we got yesterday. Governor Philip Jefferson signaled the central bank is inclined to keep interest rates steady at its next meeting in June to give policymakers the time they need to gauge the economic climate.


Meanwhile earnings from Salesforce Inc. (CRM), Crowdstrike Holdings Inc. (CRWD) both showed that the corporate customer is feeling pressure. While Salesforce raised its full year guidance, Capex was up 36% and significantly above analysts’ consensus. Crowdstrike on the other hand fell more than 10% after-hours as the company is showing signs of slowing revenue growth.