Jobs aplenty! Investors remain bullish as strong employment numbers underwhelm, making for a volatile day with a mixed close. Stocks rallied on stronger than expected employment numbers only to give up gains late in the day despite a positive Presidential tweet on China talks.
What you need to know:
1) Domestic employment remains strong. The economy saw 304k new non-farm jobs added in January beating Wall Street estimates. Last month’s number was revised down to 222k from 312k and the unemployment rate ticked up slightly to 4.0%. The last time we saw a loss of monthly payrolls was in September of 2009 making it 100 months of gains in a row, if you’re counting.
2) US-Chinese talks continue to progress, we think. The President tweeted that he would consider postponing the tariff hike that is set to trigger in March if both sides can’t come to an agreement. The market largely ignored the tweet.
3) Earnings continue to be solid but many investors remain concerned about future earnings. As reported here, many companies that reported estimate topping results have sold off due to weaker future guidance. On Friday, Amazon was a victim of poor guidance issuance. Amazon announced record earnings, beating both top and bottom line Wall Street estimates, but offered weaker future guidance. Investors were unimpressed and the stock sold off by -5.28% in Fridays session.
Stocks posted a mixed day on Friday despite a really good monthly employment situation release. Typically when an announcement of that magnitude is released stocks respond with a buying frenzy but that was not the case in Friday’s session. Though stocks initially rallied after the release they lost ground later in the session only to post a mixed close. The S&P500 inched up by +0.09%, the Dow Jones Industrial Average closed up by +0.26%, the Russell 2000 traded up by +0.18%, and the NASDAQ 100 slipped by -0.45%. The tech heavy NASDAQ was held back by Amazon, which fell in the session after giving negative guidance in their Thursday’s post-bell release. The results of the Fed’s announcement earlier in the week still has many investors puzzled and general investment dynamic is changing. First, now that the Fed has almost all but completely capitulated on all fronts, it has almost given up its power to affect equity markets. Recall that they put rate hikes on hold and hinted that balance sheet normalization may end earlier than expected. By making the announcement, the Fed actually removed themselves as a market driving factor. Stocks quickly factored in the diminished risk. There are other derivative effects of the Fed’s aggressive move and a good example is the markets reaction to Friday’s employment number. The lack of market enthusiasm that followed the report indicates that investors are not sure whether good is good or good is bad. One thing is for sure, if investors were worried that the Fed was going to raise rates too quickly and push the economy into a recession, they can put their worries aside… for now. It is important to remember a few things in the wake of the Fed move. First, the Fed put its rate hiking on hold because they had some fears about economic growth. Not a good thing. Furthermore, the economy continues to expand as evidenced by Friday’s employment number which showed not only growth in jobs but also continued growth in wages. Domestic equity markets have managed to pull themselves out of the worst December since the great depression into posting the largest January gain in decades. Though there is no China trade deal as of yet, both sides are highly motivated to make some positive arrangements. A trade deal would certainly help the faltering Chinese economy, which was at the top of the list of risks for the Fed. One has to wonder, therefore, how long the Fed will actually keep rate hikes on hold. Stocks have responded positively to the news from the Fed, but for bonds, the jury is still out. 10 year yields fell in the wake of the announcement closing out the month at 2.63%. Friday’s strong jobs number caused a sell-off in bonds causing 10 year yields to move up to 2.68%, which is a rational response to a strong jobs number which implied future inflation… and Fed rate hikes.
This morning, we will get Factory orders, which is expected to come in at +0.3% versus last month’s decline of -2.1%. We will also get the delayed Durable Goods orders report which is expected to show a growth of +1.5% compared to last month’s +0.8%. We have a few pre-market releases this morning and Alphabet/Google will announce after the bell. It will be a light week of economic releases but another dense week of earnings with 90 S&P500 companies expected to release. Please refer to the attached weekly economic and earnings calendar for details.
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