Market Update: Fri, Jan 4, 2019 | LPL Financial Research

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Daily Insights

Wild ride continues in 2019. U.S. equities are significantly higher in early trading following the release of strong jobs data (details below) and confirmation of high-level trade talks between the U.S. and China next week. However, yesterday’s 2.5% drop for the S&P 500 Index (>3% decline for the Nasdaq) showed that volatility hasn’t left us with the turn of the calendar year. It is important for investors to remember that markets are historically more volatile when below the 200-day moving average, and this includes moves to both the upside and downside. On a technical basis, we believe the S&P 500 is still likely to encounter resistance around the 2600 level (about 5% above current levels) while on the downside we will be looking for bullish divergences in breadth and momentum if we do retest the recent lows near 2350.

Wage growth and economic recessions. Nonfarm payrolls grew 312K last month, significantly above the median consensus estimate for an 184K increase. Average hourly earnings climbed 3.2% year over year in December, the fastest pace of the cycle, bucking investors’ fears that inflationary pressures may have fallen too far over the past few months. While strong jobs growth is always a good sign to us, wage growth is the most important metric to watch in jobs data these days, especially as recessionary fears increase. On the LPL Research blog, due out later today, we’ll review today’s jobs data and highlight the history of wage growth around economic recessions.

Manufacturing activity’s biggest slide in 10 years. Data released Thursday showed the ISM Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to the lowest level in two years last month. The magnitude of manufacturing’s decline was especially striking: the drop was ISM PMI’s biggest since October 2008, and it was even below the lowest consensus estimate recorded. Last month’s fallout in manufacturing activity was largely from a drop in domestic demand: the ISM New Orders Index fell the most since January 2014, while export orders actually ticked up. The disappointing ISM report showed trade tensions have curbed overall demand enough to weigh on headline economic trends. Still, we remain optimistic on U.S. manufacturing, as we see trade tensions as the primary roadblock to demand, and we expect the U.S. and China to reach a trade agreement soon.

China moves to boost slowing economy. In an effort to prop up its cooling economy, the country’s central bank cut its reserve requirement imposed on financial firms by 100bp (1.0%) to 14.5%, along with fees and taxes. The move is expected to inject liquidity by freeing up more than 800B yuan (~$116B), though it will likely take up to six months to filter through the system. However, markets reacted positively as the Shanghai Composite and Hang Seng jumped >2% to post their first positive week in three. Following the announcement, central bank officials noted that economic growth is still within a reasonable range (~6.5%) and it will continue to implement prudent monetary policy, though without engaging in massive stimulus.

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Friday

  • Nonfarm Payrolls SA
  • Germany Markit PMI Services SA (Final)
  • Eurozone CPI EU Harmonized Y/Y (Preliminary)
  • Eurozone Markit PMI Services SA (Final)
  • Eurozone PPI NSA Y/Y
  • France CPI NSA M/M (Preliminary)
  • France Markit PMI Services SA (Final)
  • Italy Markit PMI Services SA

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Index data obtained via FactSet

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