Market Update: Friday, August 5, 2016

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  • Stocks move up as jobs report trounces expectations. U.S. equities are significantly higher in early trading, following the release of the latest Employment Situation Report, which showed that employers added 255,000 jobs in July versus an expected 170,000, though unemployment remained at 4.9%. Yesterday’s session was low on both volume and movement, an unexpected reaction given the Bank of England’s surprisingly bold stimulus package. The major averages finished mixed, with 6 of the 10 sectors closing lower and technology the biggest mover, up 0.6%. In Asian markets, the Nikkeiclosed flat, and ended a disappointing week down more than 2%, while the Shanghai Composite moved lower by 0.2%. European stocks are reacting positively to the jobs report, with major indexes up around 1%. Finally, Treasuries are being hit, as the yieldon the 10-year note has shot up 0.07% to 1.56%, as is COMEX gold, which is down 1.5%.

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  • Solid July jobs report. Brexit? What Brexit? Looking back, it’s now pretty clear that the weak readings on jobs in April (144,000) and May (24,000) were indeed payback for a warm winter, distortions from a late spring break, and a strike at a major telecom carrier. Job growth over the past three months, year to date, and over last 12 months is averaging right around 200,000, more than enough to tighten the labor market, as well as push up wages and ultimately inflation. The Federal Reserve Bank (Fed) will take notice of this report. The U.S. economy added 255,000 jobs in July, far exceeding the consensus estimate, as tallied by Bloomberg News, of 170,000. The June number was revised up from 287,000 to 292,000. The unemployment rate ticked up to 4.9% in July from 4.8% in June, but that rise occurred for the “right reasons” as the labor force increased. Average hourly earnings rose 2.6% year over year in July, in-line with expectations and the June reading, and this reading is probably the most disappointing aspect of an otherwise solid report.  As we noted in our latest Weekly Economic Commentary, there is a narrow path to a September rate hike by the Fed, and this report is on that path, but a December hike is more likely.
  • Fear the Fed? Today’s strong jobs report is being highly scrutinized because of how it may influence the Fed. We’ve pointed out a number of times that stocks have historically done well after the initial Fed rate hike of an economic cycle. Did we already get this bounce? In a sense we have: the S&P 500 is up 7.4% since the Fed hiked rates on December 16, 2015. The average post-WWII gain in the S&P 500 in the year following the first rate hike of an economic cycle is 8%. That suggests stocks may end the year about where they are now, consistent with our Midyear Outlook 2016. But the bias may be to the upside: the average gain for stocks during the more gradual Fed rate hike cycles–which this one clearly is–has been higher at over 13%.
  • Weak manufacturing in core Europe. Factory orders came in weaker than expected in Germany, declining -0.4% versus expectations of a 0.5% gain. In a related piece of data, Italian industrial production fell -0.4% versus the expectation of a 0.3% gain. These are all post-Brexit data, and reflect, at least in part, continued uncertainty about the European economy. Overall, the market is not sensitive to these pieces of data individually, but they do paint the backdrop of a struggling economy.
  • Week ahead. Next week, the summer doldrums kick in, as it’s a quiet week for the Fed and the only economic reports of note are the June Job Openings and Labor Turnover Survey (JOLTS) report and the July retail sales data. It’s equally quiet in Europe next week; but it’s a busy week in China, as it begins to report its July activity and inflation data. There are a few second tier central bank meetings next week (Mexico, South Korea, Philippines) but the most important one is likely to be the Reserve Bank of India’s meeting on Tuesday.

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Friday

  • Employment Report (July)
  • Indonesia: GDP (Q2)

Click Here for our detailed Weekly Economic Calendar

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