Napalm
Two big reports are coming out -- the May National Association of Purchasing Management index (affectionately called the Napalm by bond traders) on Tuesday and the May employment report on Friday -- and they could determine the tone of things for weeks to come.
"The market," said Tony Crescenzi, Treasury market strategist at Miller Tabak Hirsch, "what it will do next week is frame what it believes is the Fed's decision June 30."
If you want to get a read on how things are with American manufacturers, the NAPM, an index based on a survey of purchasing executives at roughly 300 industrial companies, is a good place to start. For a while manufacturing was the sore spot in a booming American economy, but lately it's been showing signs of life. Manufacturers are beginning to see a bit of demand for their wares and that's giving them something they haven't had in a long time -- pricing power. From pricing power proceeds inflation.
But though it has been moving higher since its bottom last fall, the May NAPM shouldn't be all that frighteningly strong. Friday, the Chicago Purchasing Managers Index -- a NAPM for Chicago-area manufacturers -- got released, and it showed a decline from its bell-ringing April level.
"About 90% of the time, the Chicago Index has been above the NAPM," pointed out Crescenzi. On average, the NAPM has been about 3.6 points below the Chicago Index, he said, which suggests the NAPM should come in at about 54.3, or right about where economists expect it. So with luck the NAPM won't do anything to hurt the market.
But unless the NAPM comes in ridiculously low, it's unlikely that it will lay any fears to rest. The employment report, on the other hand, could lay those fears to rest. The only problem is, it could just as easily do the same thing to a lot of people's portfolios. A big jobs report, said Crescenzi, and the market will throw in the towel on hoping the Fed won't raise rates at its June meeting. A big jobs report, and people start talking about how the Fed's going to hike them 0.5 percentage points, or about how the Fed's going to hike and then hike again in August.
For stocks, all of this comes at a shaky time. For one thing, we are entering warnings season, a period when companies that aren't going to make their numbers come clean. As always, there will be some big companies stepping into the confessional, and as always they will talk about how their problems are industrywide and will hit their entire sector, even if that's not really true. And as always, there will be rumors floating around about how some big company's earnings are going to stink. Even if that's not really true.
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