U.S. equities rallied on Friday following the May jobs report, falling just shy of a closing record high. The S&P 500® index climbed 0.9 percent on the day to end the week at 4229.89. That left the index fractionally short of its May 7th closing high of 4232.60. It was the growth sectors of the index that led the way higher, rallying strongly after bond yields fell on what was perceived as a benign pace of job growth for those concerned about rising inflationary pressure. 

The economy generated 559,000 new non-farm jobs in May. That was far better than the disappointing 278,00 revised total from April. And the unemployment rate did fall below 6.0 percent for the first time in this recovery. But the number of new jobs fell more than 100,000 shy of the consensus expectation, and paled in comparison to the 978,000 jobs in Thursday’s ADP report. And the labor force participation rate edged lower for the first time in four months. Bond yields fell sharply in response. The yield on the ten-year note slid eight basis points to 1.55 percent, its lowest level since late April. That in turn gave an immediate boost to the longer duration equity sectors. On the day on Friday, technology stocks, climbed 1.9 percent, followed by a 1.4 percent gain in communication services. Utilities was the only sector that fell on Friday, but was joined by real estate, materials, and financials among the laggards. 

Stock Market Volatility Moves Lower; Economic Data Shows a Strong Rebound 
Stock market volatility continued to move lower last week. The VIX index closed on Friday at 16.4, its lowest reading since mid-April. After posting a 33.1 average reading in January, the VIX has steadily receded, falling to 28 in February, 19.4 in March, and 18.6 in April. This trend in equity volatility has been mirrored by Treasury bond volatility. The ICE Bank of America MOVE index peaked this year in February when it averaged 75.7, and has since fallen to 71.3 in March, 58.1 in April, and 52 in May. It closed last week at 49.8. Between March 4 and last Friday, the ten-year note yield has fluctuated within a tight band between 1.52-1.74 percent, averaging 1.62 throughout, exhibiting little anxiety regarding the threat of inflation. 

Last week’s other major economic report was far more emphatic than the jobs report in indicating a strong rebound. The ISM report for manufacturing rose for the twelfth straight month in May. There was particular strength in new orders and extended dealer delivery times, the latter evidence of ongoing supply chain bottlenecks. In its survey release, the ISM said, “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices, and difficulties in transporting products are continuing to affect all segments of the manufacturing economy.”  At the same time, the services sector index rose to a record high in May, its twelfth straight month of increases, as the economy continues to reopen. All 18 service sector components reported growth, but as with manufacturing, also reported delays due to supply chain constraints. Notably, however, the price sub-index rose to its highest since 2008.

Inflation Will be Top of Mind for Investors this Week; Negotiations Continue in Washington 

The ongoing question of the relative strength of inflationary pressure will be revisited this week with the release of the May CPI report on Thursday. The consensus anticipates a rise in the year-over-year headline rate to 4.7 percent from 4.2 percent in April. That would be its highest reading since September, 2008. The core rate is expected to climb to 3.4 percent, up from 3.0 percent in April. That would be its highest reading since May, 1993. Beginning with next month’s report, inflation readings are expected to moderate as last year’s baseline impacts fall out of the trailing twelve-month calculation. Of course, this remains to be seen, and despite the Fed’s consistent insistence that inflationary pressures are transitory, until such evidence emerges inflation will remain a source of anxiety for investors.  

The rest of this week’s domestic economic calendar is fairly light, headlined by jobless claims and consumer sentiment. Negotiations also continue in Washington regarding the President’s infrastructure bill. Looming on the horizon in the following week is the next Fed meeting, at which it will update its economic projections. A host of reports from the economy’s performance in May are also on the calendar next week, including retail sales, industrial production, producer prices, housing starts, and leading indicators. The European Central bank meets this week against a backdrop of firming economic activity as progress against the pandemic continues to be made. Policy is expected to be unchanged, however, as the economic recovery is still in its early stages after a first quarter recession.   

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Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

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Investing involves risk including the risk of loss of principal.

The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 years.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.

A consumer price index (CPI) measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. The annual percentage change in a CPI is used as a measure of inflation. 

The ISM manufacturing index, also known as the purchasing managers' index (PMI) is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy.

The MOVE (Intercontinental Exchange, Inc. (ICE), Bank of America Merrill Lynch Option Volatility Estimate) Index measures the U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index. 

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