Three checks! Stocks surged on Friday in response to hopes for a trade resolution, a strong jobs number, and happy talk from Fed Chief Jay Powell. Confirmation of a face to face meeting with China, the first since a 90 day truce was called in December, gave stocks an early boost on Friday leading up to the always exciting monthly employment situation. The Bureau of Labor Statistics reported that 312k new non-farm jobs were created last month which was well above the expected 184k. Average hourly earnings ticked up by +3.2% year over year versus last months +3.1% which is good news for workers. The unemployment rate came in unexpectedly higher at 3.9% versus last months 3.7% because more people are searching for work. The headline employment number, while it is a good sign for the economy, would usually be met with bearish sentiment as strong employment helps the Fed make a strong case for further rate hikes, but on Friday “good was good”. If there were any traders still unsure, Jay Powell in his sit down with his two predecessors gave equity markets that which they were desperately seeking for weeks: confirmation that the Fed would factor in weak financial market strength in their rate decisions. Though I think most logical folks would assume this, it certainly comforted markets to hear it. The S&P500 ran up +3.29%, the Dow Jones Industrial Average rose by +3.29%, the Russell 2000 gained +3.75%, and NASDAQ 100 rallied by an impressive +4.48%. In the world of charts, all of the major indices are now finally above their 23.6% Fibonacci lines and they will have to begin to build bases in order to ensure further gains (see chart 4,6,7 and 8 in my attached daily chartbook). Though Friday’s move was impressive and the new year means more buyers will be entering the fringe, all four indexes remain risk off. Bonds pulled back on Friday in response to the rush into equities and the ten year yield ended the week at around 2.67%. Interestingly, the 2 year note yield began Friday’s session yielding less than the high end of the Fed funds target (2.5%) and while it inched up during the day it still only managed to close slightly below it. This should not be surprising as fed funds futures now indicate only a 4.9% chance for a 2019 rate hike and a 24.8% chance for a rate cut. The odds at this point are in favor of no change at 70.2%. Bear in mind that these probabilities based on speculative positions in Fed Funds futures are still not aligned with the Fed’s own targets. Stocks and bonds are not the only instruments responding to a potentially easing Fed, the US dollar has been weakening and weakened further after a strong 4th quarter (see chart 13 in my attached daily chartbook). The reason for the dollar weakness is the perception of trouble and lower potential rates in the future. Remember that funds flow to strong economies with high yields and investors must convert currencies into dollar to buy US sovereign debt thus strengthening the currency.
The week ahead will feature a number of telling economic indicators starting with the ISM Non-Manufacturing Index which is expected to come in at 59.0 versus last month’s 60.7. This is a critical number and a miss here can add some pressure to the market. Later in the week we get JOLTS, mortgage applications, and the Consumer Price Index for a read on inflation. A big release comes on Wednesday as the Fed will release its minutes from last month’s FOMC meeting. You can be sure that it will be highly scrutinized for further clues on what the Fed is really thinking. This week will also feature further Fed governor speaking engagements which will also serve as a source of further rate debate. A number of economic releases due out tomorrow have been postponed because of the Governments shutdown. Yeah there is that too. Some earnings are starting to trickle in which can also affect markets, so please refer to the attached earnings and economic release calendars. All of this sums up to indicate that another volatile week may be in store for us, Caution is still advised as checks can turn into strikes really quickly. Please call me if you have any questions.