Monday's Close

E-mini S&P 500 Futures (June): Settled at 4225.50, down 2.75

E-mini Nasdaq-100 Futures (June): Settled at 13,804.25, up 37.50

Just as last week culminated with Nonfarm Friday, this week builds up into Thursday’s monumental inflation data, ECB meeting, and Initial Jobless Claims. Portfolio managers and traders want to be long risk assets such as stocks and commodities, but fear inflation that has begun to run hot. 

Last week, strong headline ISMs coupled with a private ADP survey print of nearly 1 million jobs added in May forced some unwinding. As soon as Nonfarm Payrolls confirmed tepid job growth that wasn’t in the 1-million range, those portfolio managers and traders quickly repositioned. Yes, job growth for May was only 559,000 and expectations were only 650,000, so why did we just point to 1 million as being the benchmark? Not so much because of ADP, but instead because of the feared hot read.

We’ve reiterated this ad nauseam, but will again: we applaud the Federal Reserve, they’ve been right. Job growth remains well below their expectations, they believe a rise in inflation through the summer will be transitory, they implemented symmetrical inflation targeting last year, and they want to be behind the curve. What does this all mean? 

Simply put, job growth and inflation within the range of expectations will be viewed as a green light for risk assets in the manner a data miss otherwise would’ve. At this point, the Federal Reserve wants to remain patient before tapering their bond purchases and certainly will as long as job growth doesn’t surge at a pace of 1 million per month and inflation, by their metrics of course, doesn’t run hot. 

In fact, we further believe the Federal Reserve is looking for a reason to delay taper talk until inflation reads for July and August (in August and September), when base comparisons began dramatically improving out of the deflationary window of April through June 2020. Why? Not only because they said they want to be behind the curve, but because we could actually see deflation at this time. Yes, reopening surges from April through June and low base comparisons could bring peak inflation.

What does this all mean, and how do you trade it? Just as we said Friday’s jobs data was a green light, a turnaround Monday that didn’t turn around now brings a green light that could last through the first half of Wednesday, before those same portfolio managers and traders begin unwinding excessive risk once again ahead of Thursday’s 7:30 a.m. CT data dump.

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