With the S&P 500 rallying 1.1% yesterday, the month of May ended on a solid note.  Still, it was not enough to avoid a losing month.  Participants, overall, sold in May.  The question now is, will they stay away for the rest of the summer?

At the moment, June is not projected to get off to a banner start.  The S&P futures are trading 0.4% below fair value in the wake of some soft manufacturing surveys out of China and Europe and a disappointing ADP Employment Report in the U.S.

The latter has been the stronger catalyst for the futures market.  Prior to its release at 8:15 a.m. ET, the futures were close to flat but subsequently dropped about five points when the ADP report indicated only 38,000 private sector jobs were added in May.  That was sharply below the Briefing.com consensus estimate of 170,000.

The breakdown of the ADP number showed small businesses added 27,000 positions, medium businesses added 30,000 positions, and large businesses cut 19,000 jobs.  By sector, the goods-producing sector shed 10,000 positions while the services sector added 48,000 jobs.

This report should create a cautious tone ahead of the government's employment report on Friday, which is expected to show a 185,000 increase in nonfarm payrolls. 

Then again, one might have concluded that yesterday's triumvirate of weaker-than-expected economic reports (S&P/Case-Shiller Home Price Index; Chicago PMI; and Consumer Confidence) would create a weak tone for the market, but that was certainly not the case.

The prevailing thought in yesterday's trade was that bad economic news meant good news for the equity market in terms of continued policy support from the Federal Reserve.  That inference was made from the weakening in the dollar, the drop in Treasury rates, and the outperformance of small-cap stocks.

Notably, the yield on the 10-year Note is testing 3.00% after the ADP report, which is adding some resonance to slowdown arguments. 

The ISM Index for May (Briefing.com consensus 57.6; prior 60.4), which will be released at 10:00 a.m. ET, is apt to help determine whether the 3.00% level holds or not.  Construction spending data for April will be released at the same time, yet it should take a backseat to the ISM number simply because it is a more dated report.  Auto sales results for May will be released throughout the day.

On the political front, the House voted against approving an increase in the U.S. debt limit as expected.  The voting line showed 98 for an increase and 317 against.  The huge gap was owed primarily to the understanding that this particular pass at raising the debt limit did not include any spending cuts or budget measures.

This vote may have been more grandstanding than anything else, but it demonstrates how divisive this issue is and it will feed ongoing uncertainty about Congress' ability to get a compromise worked out ahead of August 2.

Separately, we might add that the lack of hiring by large businesses indicated in the ADP report is laying a path for political backlash.  Politicians looking to get elected, and facing a disenchanted electorate that is struggling to find quality, good-paying jobs, will be more than happy to point the finger of blame at large businesses that have ample reason to be hiring -- record profits and huge cash balances -- but aren't.

This is an issue that may be at the margin now, but it has strong potential to increase in importance for the market in coming months inasmuch as it creates an expectation that there will be an adversarial political stance toward corporate America.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.