The stock market latched on to some hopeful thoughts yesterday and never looked back on its way to some huge gains. The major indices all jumped at least 2.0%, which pushed the S&P 500 back above its 200-day moving average (2775) and the Nasdaq Composite out of correction territory.
Today's open is expected to generate some follow-through gains, although another fly was added to the ointment of growth concerns with the release of the ADP Employment Change Report for May.
The latter showed an estimated 27,000 jobs were added to private-sector payrolls in May, well below the Briefing.com consensus estimate of 170,000 and the prior month's downwardly revised 271,000 (from 275,000). Jobs in the goods-producing sector decreased by 43,000 while jobs in the service-providing sector increased by 71,000.
The key takeaway from this report is that it will foment the concerns about the U.S. economy slowing in the second quarter. At the same time, though, it will feed the market's belief that the Fed is going to be forced to cut the fed funds rate sooner rather than later.
Sure enough, the notion that the Fed is sounding more like its next move will be to lower interest rates got the stock market all fired up on Tuesday. Market participants latched on to that idea, forcing a short squeeze that was key to the outsized gains.
Other "latch keys" included the hope that new tariffs on imported goods from Mexico could be forestalled and that, possibly, the U.S. and China could start talking again to work out a mutual agreement on a trade deal.
Hope doesn't always get manifested in reality, yet that was the basis anyway for the sharp reversal of trading fortune in the stock market -- and the excuse to take some wind out of the sails of the Treasury market.
That attitude was entrenched overnight in the futures market, which saw the S&P futures gain as many as 20 points despite the World Bank lowering its 2019 global growth forecast to 2.6% from 2.9% in January, despite China's Caixin Services PMI report for May checking in weaker than expected, and despite the Semiconductor Industry Association reporting sales were down 14.6% yr/yr in April.
Growth concerns were not the focal point so much as rate-cut expectations were. However, the ADP report has acted like a splash of cold water on the face of the market.
The S&P futures are now up eight points, which leaves them 0.3% above fair value. The Nasdaq 100 futures are up 38 points and the Dow Jones Industrial Average futures are up 77 points, which leaves them trading 0.7% and 0.3% above fair value, respectively.
The cash market, then, is still on track for a positive open, only it will be a little more subdued than what was expected earlier. Better-than-expected earnings results from Salesforce (CRM), Ambarella (AMBA), and Campbell Soup (CPB) are adding a measure of support.
In the same vein, the ADP number provided a measure of support for the Treasury market and the rate-cut view. The yield on the 2-yr note, which stood at 1.86% prior to its release, has plummeted to 1.79% in the wake of the release, leading to a further steepening of the 2-10 spread, which is currently 30 basis points.
The Treasury market is clearly clamoring for a rate cut (or two) from the Fed. The stock market, meanwhile, is latching on to the idea that a rate cut (or two) is likely key for sustaining the bull market.