US Close – Stocks soften on strong data ahead of NFP, Biden tax proposal, Meme Stock Mania, Oil turns negative on fuel supply rise, Gold tumbles

US stocks are all over the place, with the Nasdaq leading the decline as investors grapple with a Fed that is almost ready to start thinking about tapering, and as President Biden pivots on taxes in hopes to secure an infrastructure deal.  Biden might abandon the corporate tax rate hike to 28% in favor of a 15% tax floor.  Megacap tech stocks are under pressure today as Treasury yields rally and a potential 15% tax floor will likely mean they will be paying much more.

FX
The dollar is king for a day as robust economic data gave the greenlight for Treasury yields to liftoff. Tomorrow’s employment report could send the 10-year to 1.70% or back down below 1.60%.
Taper

Fed

The Fed is entering a new chapter in this economic recovery.  Yesterday, the Fed announced they will sell $13.7 billion of corporate bonds and ETFs that were acquired via the emergency-lending vehicle set up earlier in the pandemic.  Fed’s Harker also said it’s time to ‘think about thinking about’ tapering.

US Data

Today’s economic data was supportive for a swift labor market recovery, which threw added fuel onto brewing taper fears.  The May ADP employment change almost topped 1 million jobs, initial jobless claims fell to 385,000, a post-pandemic low, and the ISM services index rose to an all-time high.  If tomorrow’s nonfarm payroll report impresses, Treasury yields could surge and investors may take some risk off the table.  A substantial stock market pullback seems unlikely given the looming infrastructure deal, the economy still being early in the robust part of the recovery, and too much stimulus is still in the system.

Meme Stocks

Meme stock mania part deux is different from what happened at the end of January and does not seem to pose a risk to financial stability or liquidity for brokerages.

Meme stocks are not aligned with any fundamentals and this wild wild west trading will probably last a little while longer. Eventually, the SEC will address this fervor, as this is not healthy for most market participants.

Oil
Crude prices turned negative after the EIA crude oil inventory report provided a mixed picture for stockpiles.  The headline draw of 5.1 million barrels, was more than double the consensus estimate, but in-line with the API estimate of 5.4 million bbl decline.  What surprised many traders was the surprise rise in gasoline and distillate inventories.  Gasoline inventories were expected to deliver a draw of 1.8 million but posted a build of 1.5 million, while distillates had stockpiles increase by 3.7 million versus an expected 2.1 million draw.

WTI crude was ripe for a pullback and energy traders are using today’s fuel supply rise and risk aversion theme as an excuse to lock-in profits.

Gold
It has been a very rough 24 hours for gold prices.  Gold’s pullback started with the Fed’s announcement to begin winding down corporate bond holdings, alongside Fed Harker’s willingness to discuss the tapering timeline.  Today’s US data points forced everyone to become more upbeat about the labor market and economy.  The dollar was ripe for a rebound and that could accelerate if tomorrow yields an impressive employment report.

Gold’s in a tough spot right now and the current selloff could target the $1,850 level. If the 10-year Treasury yield continues to rally post-nonfarm payrolls towards 1.70%, gold could see one last thrust lower before investors start to scale back in.  Gold’s medium-and long-term outlook still remains bullish, on strong central bank buying, growing needs for inflation hedges, and with a stubborn Fed that will not raise rates until 2024.

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