Market Perspective for May 31, 2016

Markets opened the holiday-shortened week with improving economic data. There’s a fair amount of key economic and earnings news due out in the coming week, notably the May U.S. non-farm payroll report, the last major labor market report before the June Federal Reserve meeting. Various Fed officials, including Fed Chair Yellen, have implied raising interest rates by another 25 basis points or signal a July hike at the June 15 meeting.

Japan started the week on a positive note. Japanese Prime Minister Shinzo Abe plans to delay a sales tax increase until 2019 with further stimulus measures expected to follow. Various PMI indexes will be released on Wednesday. Thursday, the European Central Bank (ECB) is expected to leave interest rate policy unchanged. The Brexit vote looms large with three weeks until the vote.  Those in favor of remaining in the EU are firmly ahead in polls, which has resulted in rise for the British pound.

In the U.S, the S&P/Case-Shiller House Price Index for March showed a 0.8 percent monthly increase. Home prices are up 5.2 percent year-over-year.  PMI for U.S. manufacturing will be released on Wednesday.  The ISM manufacturing survey is expected to decline slightly to 50.3. Last week, the flash Markit PMI came in at 50.8, but the market shrugged it off. In contrast to potentially weaker May PMIs, the latest Fed Beige Book is expected to reflect continued strength in the industrial sector and overall business confidence.

The Energy Information Administration (EIA) is expected to report an increase in last week’s crude inventory. Oil will try to crack $50 a barrel this week. May auto sales report will also be out this week and is expected to show a slight decrease in the annual sales rate after hitting a record high pace in April.

 Thursday’s weekly unemployment claims report will be overshadowed by the May labor report on Friday, which includes the unemployment rate and average hourly wages. Economists forecast a dip in the unemployment rate to 4.9 percent. Factory orders for April will also be available on Friday.

Financial markets are still uncertain about a Fed rate hike given the central banks proclivity for changing its mind, but overall positive data this week will likely push the market to near certainty (as certain as financial markets get) of a rate hike by July.

As earnings season nears its end, investors will hear reports from medical device manufacturer Medtronic and luxury goods retailer Michael Kors. Other leading companies reporting this week include the semiconductor and communications technology firms Broadcom and Ciena. Tuesday, Medtronic (MDT) is expected to report earnings per share of $1.26 on revenues of $7.49 billion. The company has raised its dividend 38 consecutive years and investors are anticipating another dividend hike in the near future. MDT is 14 percent of iShares US Medical Devices (IHI) and 23 percent of Fidelity Select Medical Equipment and Systems Portfolio (FSMEX).

The battered retail sector could hit the luxury fashion segment when Michael Kors (KORS) reports. Shares have fallen in May along with department stores, but the company’s handbags are reportedly being removed from Nordstrom (JWN).  Consensus estimates call for EPS of $0.97 on revenues of $1.15 billion.

The semiconductor and wireless communications industry will take center stage later in the week when Broadcom (AVGO) and Ciena (CIEN) report Thursday. AVGO is expected to deliver EPS of $2.38 and revenues of $3.55 billion. Analysts forecast CIEN will report EPS of $0.27 on revenues of $630.7 million. AVGO is 11 percent of iShares PHLX Semiconductor (SOXX).

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