Things look calm in the markets on the surface, but dig a little deeper and some may be preparing for volatile summer, no thanks to the Fed.
Federal fund futures contracts show that traders see a 52% chance that the first Fed rate hike will come at the Fed's second-to-last meeting of the year. Prior to Friday's better-than-expected May jobs report, traders were convinced the Fed would stand pat on rates until December. Some even surmised the Fed wouldn't budge until 2016, seeing a sustained improvement in the U.S. economy. But the May employment report shed light on several areas of the market already undergoing an adjustment for the potential of a hawkish Janet Yellen at the June 18 Fed press conference.
Upcoming reads on consumer confidence and retail sales, based on the jobs report, would only embolden Yellen's firmer stance on rates. Note that the intention to lift rates later this year would likely occur at the June meeting. Here are the three areas of the market perhaps causing trouble for equities more broadly real soon.
Since April, yields on U.S. 10-year notes have surged about a half-percentage point. The selloff accelerated last week after the jobs report, strengthening the Fed's case for higher rates.
2. Emerging Markets
Asset valuations in emerging markets have been heavily subsidized by the Fed's ultra-low rate policy. Now emerging-market stocks are suggesting the Fed will not be as friendly this fall. The move in these stocks conjures images of the "taper tantrum" evident a couple of years back by the Fed's then-Chairman Ben Bernanke.
On a positive note, we haven't yet received the earnings warning from UPS (UPS) or FedEx (FDX) that would lend credence to the selloff in the transports. But the decline in transports, especially the airlines, remains worrisome as it's coming as emerging-market stocks are seeing selling pressure. I would be listening into earnings calls today from Tupperware (TUP) and Clorox (CLX) tomorrow to learn if emerging-market demand is waning. It might also be worthwhile to queue into the call today from Coach (COH), which does big business in China.
Note: McDonald's (MCD) pointed to a "negative performance" in China last month, something it didn't do in its April sales release issued in May.
Apple (AAPL) stock has been underperforming the last five days, right into the teeth of the company's Worldwide Developers Conference, which began Monday. I don't believe it's something to be worried about. The stock could trade sideways into the company's next earnings report in July -- the market needs to get the Apple Watch sales numbers before making a grand wager on a bumper holiday season (which would include expectations of the release of exciting new products this fall, including a new Apple iPad with a larger screen destined to take on Microsoft Surface for corporate America).
Regarding the flurry announcements from Apple on Monday, from a Beats music streaming service to software updates, I think the early takeaway is the tech giant remains on a nice streak of innovation. For a period a little while back, Apple was seen as falling behind rivals in areas that include maps and hardware. However, the company continues to drive those fears out of the market, and in the process, gives investors reassurance that it's always working on the next big thing.