Market Update: Friday, February 3, 2017

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  • Stocks, bonds up after jobs report. (10:36am ET) Investors are pushing equities and bonds higher this morning as they sift through an Employment Situation Report that saw jobs come in ahead of expectations while the unemployment rate ticked up. The major U.S. indexes closed little changed Thursday as investors held steady in anticipation of the report. Defensive sectors were the biggest movers; real estate (+1.3%), utilities (+1.0%), and consumer staples (+0.8%) topped the leaderboard, while telecom (-1.3%) lagged. Overseas Friday, the Nikkei closed flat while the Shanghai Composite slipped 0.6% as it reopened after the long holiday. Major European markets that saw an early run-up on the heels of a rebound in the banking sector are now trending sideways in afternoon trade. Meanwhile, WTI crude oil ($54.17/barrel) is up over 1%, COMEX gold ($1221/oz.) is near flat, and the yield on the 10-year Treasury is down five basis points (0.05%) to 2.43%.

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  • Another “goldilocks” jobs report. The January employment report told markets that the economy is performing well enough to create lots of jobs, but not enough to cause wages to rise, which could hurt profit margins and prompt more immediate (i.e. at the March FOMC meeting) action from the Federal Reserve Bank (Fed). The U.S. economy created 227,000 net new jobs in January, far above the consensus estimate of +180,000; there were only minor revisions to prior months. The unemployment report–culled from a different survey than the survey that produces the job count–moved higher in January (4.8%) from 4.7% in December. The market was expecting the rate to stay at 4.7%. Average hourly earnings-a timely but imperfect proxy for wage inflation-decelerated to a 2.5% year-over-year gain in January from the 2.8% reading in December. The market was expecting a 2.7% reading. On balance, the January jobs report was mixed relative to expectations, but keeps the Fed on track to do two to three 25 basis point hikes in 2017, but reduces the odds that the first hike will come as soon as the March FOMC meeting. Despite the soft reading on wages, in the last 12 months, job growth averaged a robust 195,000/month, nearly double what the Fed thinks is needed to tighten the labor market and push up wages.
  • Quiet week ahead. This past week (January 30-February 3) was an unusually busy one for economic data and policy. Next week (February 6-10), is not. While China will begin to report its January 2017 data set after the Lunar New Year holiday, there are few if any potentially market moving data reports on tap in the U.S., Europe, or Japan next week. There are a handful of Fed speakers, ECB president Mario Draghi will deliver a speech, and central banks in emerging markets will be busy as Mexico is expected to raise rates and India is expected to cut. The U.K. parliament will continue to debate and then vote next week on whether to trigger Article 50 and start the process of leaving the EU.
  • Is eight great? We will call fourth quarter earnings season good but not great. Thomson-tracked earnings growth for the S&P 500 for the quarter are now tracking to 7.9%, which is 1.8% above estimates as of January 1. This is less than the long-term average with just over half of index constituents having reported. The latest bump up in results has been driven by improvement in the energy sector, which is now tracking toward a 1% year-over-year increase for the quarter after seeing a decline following the initial batch of results. Next week is another busy week of earnings reports although the pace will slow substantially from the more than 100 over the last week. Look for our updated earnings dashboard on Monday.
  • China reopens. The Chinese market, and China generally, reopened this morning after being closed for the previous week due to the New Year’s holiday. Stocks in China declined a modest 0.6% this morning and the currency has been strengthening slightly. The Caixin report of private manufacturing PMI was disappointing. The January figure was still expanding at 51, but below both expectations and the previous month. The Chinese central bank also modestly tightened monetary policy, though this is common after the New Year’s holiday and may not necessarily represent a change in policy.
  • Buckle up for February. February has been calm so far, but will it stay that way? Since 1928[1], the S&P 500 is down 0.05% on average in February (ranking 10th out of the 12 months), with only September and May also negative. Yet, when February has been higher, it is up only 2.9% on average, which is the weakest out of all 12 months. Also, February has been higher only 53% of the time – ranking it last out of the 12 months. Lastly, to add a wrinkle, over the past five years February is actually the strongest month – up 2.9% and higher four times. The bottom line is this month has been volatile lately and after the historically slow month of January for equities, be open to volatility picking up during the shortest month of the year.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
  • The slow days continue. We’ve been talking a lot about the historically slow moves in equities over the past month and that continued again yesterday. In fact, the S&P 500 has now closed between +0.1% and -0.1% five of the past six days. Incredibly, that has only happened 18 times going back to 1928[1]. Additionally, the S&P 500 hasn’t closed down 1% for 78 straight days – the longest streak since 94 in 2006. Last, the S&P 500 hasn’t traded above a 1% intraday range for 33 consecutive days, one day away from tying the record of 34 in a row in 1995.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

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Click Here for our detailed Weekly Economic Calendar

Friday

  • Employment Report (Jan)
  • ISM Non-Mfg. (Jan)
  • Evans* (Dove)
  • EU Leaders Meet in Malta

 

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