OREANDA-NEWS.  U.S. equities enjoyed their strongest week since early March, climbing 2.3 percent despite growing acceptance that a second rate hike from the Federal Reserve is coming soon. Chair Yellen did nothing to dispel that notion in public remarks on Friday when many investors no doubt had one foot out the door ahead of the long holiday weekend. Stocks nevertheless ended the session and the week on a positive note.

Financial stocks once again contributed to the rally, climbing 2.6 percent. Banks in particular rose 3.2 percent. Since the market’s nadir on Feb. 11, the KBW bank index has surged by 26 percent, easily outpacing the broader market’s 15 percent advance. Overall, the financial sector has fought its way back to even for the year after having been down as much as 18 percent in February. As strong as financials were last week, they were nevertheless eclipsed by technology stocks, which rose 3.2 percent, helped by a 5.4 percent rise in Apple. On the other hand, energy stocks failed to keep pace with the overall market, rising 1.5 percent, despite oil briefly rising above $50 a barrel on Thursday for the first time since last November.

A July rate hike becomes more likely

The dollar rose only modestly last week, after climbing steadily throughout most of the month. That was welcome news for Japan, where stocks rose for the third straight week as the yen continued to back off from its recent strength and rumors surfaced that a pending sales tax increase would be postponed. Eurozone equities spiked by 4 percent, also helped by the weaker euro. Emerging market stocks enjoyed a strong week, climbing 2.7 percent, led by strength in Asia, China in particular, as commodity heavy Latin America lagged.

There was little movement in the treasury curve last week, as the two-year note fell 2 basis points to yield 0.87 and the ten-year rose one basis point to 1.85 percent, not surprising as expectations regarding the next rate hike rose only slightly. The odds of a June increase climbed to 30 percent from 28 percent the previous week, while the odds of a July rate hike rose from 48 to better than even at 54 percent.

All eyes will be on the May jobs report this week

The sensitivity of the treasury curve will be tested this week as the economic calendar is full of market moving reports. Topping the list is the May employment report on Friday. The April report showed the addition of 160,000 new jobs, which was below the 203,000 monthly average in the first three months of the year, raising speculation that the labor market strength was beginning to slow. The consensus estimate this time, according to Bloomberg, is once again 160,000 new jobs, although some private estimates range significantly higher. As always, the growth in wages will be watched carefully after they rose last month to a year-over-year pace of 2.5 percent from 2.3 percent in March.

Before we get to the jobs report, April data on personal income and spending, as well as inflation are scheduled on Tuesday. The spending report is expected to show a strong rebound in April, while the headline personal consumption deflator is also expected to jump in part on strength in gasoline prices. According to AAA, the national average price for a gallon of unleaded gasoline rose to $2.32 from $2.21 one month ago. Nevertheless, it remains well below the $2.74 price from one year ago. Other economic reports this week include home prices, ISM manufacturing and service sector activity, construction spending, motor vehicle sales and factory orders. The Fed also releases its Beige Book survey of economic activity in advance of its meeting on June 14-15.

Lastly, it may be worth noting for the contrarians that the weekly survey from the American Association of Individual Investors showed the lowest percentage of bullish investors in eleven years last week. Just 17.8 percent of the survey’s respondents described themselves as bullish, compared to the historical average of 38.5 percent.

Important Disclosures:       
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The KBW Index is weighted according to capitalization and represents major banks and money centers from across the country.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
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